FDI vs FPI in India, the 10 Percent Line and Reclassification in 2026

Written by Nihal Srivastava, Krystal7 Consultants. Last updated 1 October 2026.

FDI is foreign equity investment of any size in an unlisted Indian company. In a listed company, it is a stake of 10 percent or more of post issue paid up equity capital on a fully diluted basis. FPI is a stake below that line. Rules 2(r) and 2(t) of the Non Debt Instruments Rules, 2019 draw it. An FPI that crosses 10 percent must sell the excess within five trading days of settlement, or reclassify its whole holding as FDI.

This page covers the legal line, SEBI registration, reclassification, tax under the Income Tax Act, 2025, and reporting. It ends with a Japanese company buying 12 percent of a listed Indian supplier.

What is the difference between FDI and FPI?

FDI is a lasting equity stake: any holding in an unlisted Indian company, or 10 percent or more of a listed one. FPI is a tradeable stake below 10 percent of a listed company, usually held by an investor registered with SEBI. The two differ in entry rules, limits, reporting and parts of their tax treatment.

The Foreign Exchange Management (Non Debt Instruments) Rules, 2019 (the NDI Rules) define both. Under rule 2(r), FDI is investment through equity instruments by a person resident outside India in an unlisted Indian company. It also covers 10 percent or more of the post issue paid up equity capital of a listed company, on a fully diluted basis.

Rule 2(t) defines foreign portfolio investment as a holding below that 10 percent in a listed company. It also applies the test to the paid up value of each series of equity instruments. The RBI Master Direction on Foreign Investment in India, updated as on 15 Jun 2026, repeats both definitions in paragraphs 2.8 and 2.9.

Point	FDI	FPI
Legal definition	Rule 2(r), NDI Rules	Rule 2(t), NDI Rules
Company type	Unlisted (any stake) or listed (10% or more)	Listed or to be listed only
Investor	Any person resident outside India	SEBI registered FPI
Governing schedule	Schedule I, NDI Rules	Schedule II, NDI Rules
Entry route	Automatic or government route by sector	Aggregate FPI limit; no sector approval up to 49% (MD para 5.1.4)
How shares are bought	Allotment, purchase from holders, open offer	On the stock exchange or in an IPO
Price rule	Fair value floor for unlisted; SEBI price for listed	Market price on the exchange
Who reports to RBI	Indian company (FC-GPR); resident party (FC-TRS)	AD bank (Form LEC (FII))
Annual return	FLA by 15 July	FEMA 395 ties FLA to FDI received
Tax regime	General rules: sections 197, 198, 207	Section 210, Income Tax Act, 2025
Control	Board seats and control possible	Passive holding below 10%

Our FDI compliance guide covers the subsidiary side.

Where is the 10 percent line drawn?

The line is 10 percent of a listed company's post issue paid up equity capital, counted on a fully diluted basis. Preference shares, debentures and warrants are tested series by series. An FPI counts its whole investor group. A holding that becomes FDI stays FDI even if it later falls below 10 percent.

Four details decide where a holding sits.

1. Fully diluted basis. The explanation to rule 2(r) counts every share that would exist if all sources of conversion were exercised. Options, warrants and convertibles go in the denominator.
2. Each series. Rule 2(t) tests each series of equity instruments. A 12 percent stake in one series of convertible preference shares crosses the line.
3. Investor group. Regulation 22(3) of the SEBI (Foreign Portfolio Investors) Regulations, 2019 clubs related FPIs. The test is "common ownership of more than fifty per cent or common control".
4. Once FDI, always FDI. Paragraph 2.8.1 of the Master Direction keeps an existing FDI as FDI after it falls below 10 percent.

Under the note to rule 2(s), a person resident outside India holds its investment in a particular Indian company as FDI or as FPI. It cannot hold both.

Threshold	Figure	Applies to	Source
FDI or FPI line	10% of post issue paid up equity capital, fully diluted	Each foreign investor in a listed company	Rules 2(r) and 2(t), NDI Rules
FPI individual limit	Below 10%, investor group clubbed	Each FPI and its group	Regulations 20(7) and 22(3), SEBI FPI Regulations
Breach window	Five trading days from settlement of the breach trade	FPI over 10%	Regulation 20(7) proviso; RBI Circular No. 19 of 2024
Aggregate FPI limit	Sectoral cap of the company, unless the company has a lower limit in place	All FPIs together	Schedule II, NDI Rules
Aggregate FPI limit, prohibited sector	24%	All FPIs in a company in a sector closed to FDI	MD para 5.1.4
Portfolio without sector approval	Up to 49%, or the cap if lower	Aggregate portfolio investment, no change in ownership or control	MD para 5.1.4
Unlisted company	Any amount is FDI	Every non resident equity investor	Rule 2(r), NDI Rules

How do the aggregate FPI limits and sectoral caps work?

All FPIs together may hold up to the company's sectoral cap. In a sector closed to FDI, the aggregate FPI limit is 24 percent. Aggregate portfolio investment up to 49 percent needs no government approval or sectoral conditions. The condition is that ownership and control stay with resident Indian citizens.

Paragraph 5.1.4 of the Master Direction sets both the 49 percent rule and the 24 percent limit. Schedule II of the NDI Rules ties the aggregate FPI limit to the sectoral cap. Some listed companies kept a lower aggregate limit. Ask your custodian for the limit that applies to the company before you buy.

Paragraph 7.1.4 of the Master Direction makes an FPI sell any excess over these limits within five trading days after settlement.

FPI holdings also count in ownership tests. Rule 2(s) defines foreign investment as repatriable investment held as FDI or FPI. A listed company more than half owned by persons resident outside India is owned by them. Its investments in other Indian companies then count as indirect foreign investment under rule 23.

Can an FPI invest in an unlisted company?

No, not as an FPI. Rule 10(1) of the NDI Rules limits FPIs to companies listed or to be listed on a recognised stock exchange. Any equity investment in an unlisted company is FDI under rule 2(r), whatever its size. The foreign entity must invest under Schedule I and report it as FDI.

Regulation 20(1)(a) of the SEBI FPI Regulations says the same. An FPI may buy "shares, debentures and warrants issued by a body corporate; listed or to be listed on a recognized stock exchange in India". The words "to be listed" let an FPI apply in an IPO. They do not open a private round years before a listing.

So a fund registered as an FPI that wants a stake in an unlisted start up invests as a foreign direct investor. The company files FC-GPR within 30 days of allotment. Our FDI reporting guide lists every form on that path.

Who can register as an FPI, and how?

A non resident entity or individual registers through a designated depository participant (DDP), which grants the certificate on SEBI's behalf. Registration falls in Category I or Category II. It stays valid while the investor holds Indian securities, if the fee for each three year block is paid.

Regulation 3 of the SEBI FPI Regulations sends the application to a DDP. Regulation 7(1) lets the DDP grant registration "on behalf of the Board". Under regulation 4, the applicant must not be a resident Indian, an NRI or an OCI. Its home regulator must sign the IOSCO multilateral memorandum or a bilateral memorandum with SEBI, with some carve outs.

NRIs, OCIs and resident Indian individuals may still contribute to an FPI's corpus. Regulation 4(c) keeps each one below 25 percent and all of them together below 50 percent, without control.

Item	Category I	Category II	Source
Who fits	Governments and related investors, pension and university funds, regulated banks, insurers and asset managers, certain regulated funds	Other eligible investors, such as other regulated funds, endowments, charities, corporate bodies, family offices and individuals	Regulation 5
Validity	As long as it holds Indian securities	Same	Regulation 7(5)
Fee per three year block, to 2 Jan 2027	USD 2,500	USD 250	Second Schedule, Part A
Fee from 3 Jan 2027	INR 2,30,000 in foreign exchange equivalent	INR 23,000 in foreign exchange equivalent	SEBI (FPI) (Amendment) Regulations, 2026
SWAGAT-FI option	Government related investors and public retail funds; ten year fee block	Only public retail funds as defined in regulation 22(4)	Regulations 2(r) and 7(6), from 1 Jun 2026

SWAGAT-FI stands for Single Window Automatic and Generalised Access for Trusted Foreign Investors. The SEBI (FPI) (Second Amendment) Regulations, 2025 inserted it in regulation 2(r) from 1 Jun 2026. SEBI's circular of 16 Jan 2026 set out the framework.

A foreign trading company registers in Category II as a corporate body. A strategic buyer can skip FPI registration and use the FDI route.

What happens when an FPI crosses 10 percent?

The FPI has five trading days from settlement of the trade that caused the breach. It must sell the excess or reclassify its entire holding, with its investor group, as FDI. Reclassification needs any government approval and the investee company's concurrence, obtained before the FPI buys past 10 percent.

RBI set the framework in A.P. (DIR Series) Circular No. 19 of 11 Nov 2024 (RBI/2024-25/90), applying paragraph 1(a)(iii) of Schedule II. SEBI issued the custodian procedure the same day in circular SEBI/HO/AFD/AFD-POD-3/P/CIR/2024/152. The RBI conditions are strict.

1. "The facility of reclassification shall not be permitted in any sector prohibited for FDI."
2. The FPI needs government approvals where applicable, including for investment from land bordering countries.
3. The holding must meet FDI entry routes, sectoral caps, investment limits and pricing guidelines.
4. The FPI needs the concurrence of the Indian investee company, so it can check its caps.
5. The FPI must hold these approvals before it intends to buy beyond the limit.
6. The custodian freezes the FPI's purchases in that company until reclassification is complete.

Reporting follows the FEMA 395/2019-RB timelines. The Indian company reports a fresh issue in FC-GPR. The FPI reports secondary market purchases in FC-TRS. The circular treats the date of the investment causing the breach as the date of reclassification.

Step	Action	Who acts	When	Source
1	Check the sector is open to FDI and within its cap	FPI	Before buying past 10%	RBI Circular No. 19 of 2024
2	Obtain any government approval, including land border approval	FPI	Before buying past 10%	RBI Circular No. 19 of 2024
3	Obtain the investee company's concurrence	FPI and company	Before buying past 10%	RBI Circular No. 19 of 2024
4	Tell the custodian of the intent to reclassify	FPI	Before or at the breach	SEBI Circular 2024/152
5	Freeze further purchases in that company	Custodian	Until reclassification completes	Both circulars
6	Choose reclassification over selling the excess	FPI	Within five trading days of settlement	Regulation 20(7) proviso
7	Report in FC-TRS (market purchases) or FC-GPR (fresh issue)	FPI or company	FC-TRS within 60 days; FC-GPR within 30 days	RBI Circular No. 19 of 2024; FEMA 395 regulation 4
8	Move the shares from the FPI demat account to the FDI demat account	Custodian, on request	After reporting is complete	SEBI Circular 2024/152
9	Treat the whole holding as FDI	FPI and company	Permanently	RBI Circular No. 19 of 2024

The second proviso to regulation 20(7) adds SEBI's consequence. The FPI and its investor group "shall not make further portfolio investment in that company". Later purchases must use the FDI route.

Can an FDI holding in a listed company go back to FPI?

No. Paragraph 2.8.1 of the Master Direction keeps FDI as FDI after it falls below 10 percent. RBI Circular No. 19 of 2024 says the same for reclassified holdings. A holder that sells down to 8 percent still holds FDI and still reports as FDI.

Under Annex 1, paragraph 1.2 of the Master Direction, a foreign direct investor buys on the exchange only if it holds control. That control must come under the SEBI takeover regulations.

On our reading, a reclassified holder at 12 percent, without control, cannot top up through ordinary market purchases. It needs a preferential allotment, an off market purchase or an open offer. Our note on share transfers between residents and non residents covers the off market route.

How are FDI and FPI taxed differently?

On listed shares the rates match: 20 percent on short term gains and 12.5 percent on long term gains above INR 1,25,000. The regimes differ. FPIs fall under section 210 of the Income Tax Act, 2025 and suffer no withholding on gains. FDI in unlisted shares uses a 24 month holding period and section 197.

Section 210 of the Income Tax Act, 2025 carries the regime of old section 115AD from 1 Apr 2026. Section 210(6)(a) lets the government notify who is a Foreign Institutional Investor. The Income Tax Department's FAQs on FIIs say SEBI registered FPIs were notified as FIIs on 22 Jan 2014.

Those FAQs set 20 percent on income from securities and 30 percent on short term gains outside section 196. The table below gives the rest.

Three FPI features have no FDI equivalent.

1. Capital asset by law. Section 2(22)(b)(i) treats securities held by an FII that invested under SEBI regulations as capital assets.
2. No withholding on gains. Section 393(4), serial 16, removes deduction on an FII's capital gains from section 210 securities. The FPI pays the tax itself as advance tax under section 408.
3. Dividend withholding. Section 393(2), serial 15 covers an FII's income from securities. Note 2 sets 20 percent, or a lower treaty rate with the section 159(8) certificate. The department's TDS rate chart for tax year 2026-27 adds surcharge and cess to the table rates.

A foreign company holding FDI follows the general rules. Section 207(1) taxes its dividends at 20 percent. The Indian company withholds under section 393(2), serial 17, at 20 percent plus surcharge and cess, or the treaty rate. Our guide to dividends paid to a foreign parent covers the treaty papers.

Holding periods follow the asset, not the route. Section 2(101) makes an asset short term if held for 24 months or less. For a listed security, the limit is 12 months.

Item	FPI (section 210)	FDI parent, listed shares	FDI parent, unlisted shares	Source
Dividend tax rate	20%	20%	20%	Sections 207(1) and 210
Dividend withholding	20% plus surcharge and cess, or treaty rate (serial 15)	20% plus surcharge and cess, or treaty rate (serial 17)	Same as listed	Section 393(2)
Long term after	12 months	12 months	24 months	Section 2(101)
Short term gain, STT paid	20% (section 196)	20% (section 196)	Not applicable	ITD TDS FAQs
Short term gain, other	30%	35% (foreign company rate)	35% (foreign company rate)	Section 210 FAQs; ITD TDS FAQs
Long term gain	12.5% above INR 1,25,000 (section 198)	12.5% above INR 1,25,000 (section 198)	12.5% (section 197(4))	ITD TDS FAQs
Withholding on gains	None (section 393(4), serial 16)	Depends on sale route	Buyer withholds (serial 17)	Section 393
Treaty claim papers	TRC and Form 41	TRC and Form 41	TRC and Form 41	Section 159(8); rule 75

Surcharge for a foreign company is 2 percent of tax above INR 1 crore of income, and 5 percent above INR 10 crore. Cess adds 4 percent. The department's FAQs on computation of tax exclude income under sections 196, 197, 198 and 210 from the 25 and 37 percent surcharge.

The next table shows tax on an INR 10,00,00,000 gain for a foreign company at the 2 percent surcharge slab.

Holding	Rate and section	Base tax (INR)	Surcharge 2% (INR)	Cess 4% (INR)	Total (INR)	Effective rate
Unlisted, 24 months or less	35%, normal rate	3,50,00,000	7,00,000	14,28,000	3,71,28,000	37.128%
Unlisted, over 24 months	12.5%, section 197	1,25,00,000	2,50,000	5,10,000	1,32,60,000	13.26%
Listed, STT paid, 12 months or less	20%, section 196	2,00,00,000	4,00,000	8,16,000	2,12,16,000	21.216%
Listed, STT paid, over 12 months	12.5% above INR 1,25,000, section 198	1,24,84,375	2,49,688	5,09,363	1,32,43,426	13.243%

Treaties can move these numbers. Article 13(3) of the India Japan treaty lets India tax gains on shares of an Indian company. Other treaties differ, so read the article for the investor's country.

Which reporting applies to each?

FDI reporting sits with the Indian company and the resident party. FC-GPR is due within 30 days of an allotment, FC-TRS within 60 days of a transfer, and the FLA return by 15 July. For FPI trades, the AD bank reports to RBI in Form LEC (FII). SEBI disclosure rules apply to both.

Regulations 4(1), 4(2) and 4(3) of FEMA 395/2019-RB set these deadlines. The FC-TRS clock runs from the transfer or the receipt of funds, whichever is earlier.

For portfolio trades, regulation 4 makes AD Category I banks report FPI purchases and transfers on Indian exchanges in Form LEC (FII). A non resident selling FDI shares on an exchange reports the sale itself in FC-TRS.

Duty	FDI	FPI	Source
Registration before investing	Entity Master on FIRMS for the company	SEBI registration through a DDP	FIRMS; SEBI FPI Regulations, regulation 3
Money in	Inward remittance through banking channels	Inward remittance, foreign currency account or SNRR account	FEMA 395/2019-RB, Schedules I and II
Shares against money	Within 60 days of receipt, or refund within 15 days after	Exchange settlement	FEMA 395/2019-RB, regulation 3.1
Fresh issue report	FC-GPR within 30 days, by the company	Only on reclassification	Regulation 4(1)
Transfer report	FC-TRS within 60 days, by the resident party	LEC (FII), by the AD bank	Regulation 4
Annual return	FLA by 15 July, by the company	The rule names FDI received	Regulation 4(2)
Takeover disclosures	At 5%, then each change of more than 2%, within two working days	Same	SEBI SAST Regulations, regulation 29
Late filing	Late submission fee, then compounding	The AD bank files LEC (FII), not the FPI	A.P. (DIR Series) Circular No. 16 of 2022; regulation 4

SEBI adds a disclosure layer for large or concentrated FPIs. On 9 Apr 2025 it raised the size trigger from INR 25,000 crore to INR 50,000 crore of Indian equity AUM. The circular is SEBI/HO/AFD/AFD-POD-3/P/CIR/2025/52. It amends the FPI Master Circular of 30 May 2024, which holds the full criteria. Ask your DDP whether any criterion catches your FPI.

Our FC-GPR and FC-TRS comparison has the detail. RBI replaced its Master Direction on Reporting under FEMA on 23 Sep 2026, so check the current version before filing.

How does the land border rule treat FDI and FPI?

An investor from a country sharing a land border with India may invest as FDI only on the government route. The same applies where its beneficial owner is a citizen of such a country. Rule 6(a) of the NDI Rules sets this. For an FPI, that approval is a condition for reclassifying to FDI.

The NDI (Amendment) Rules, 2026 added Explanation 2 to rule 6(a). It reads beneficial ownership with rule 9(3) of the PML (Maintenance of Records) Rules, 2005. The Cabinet release of 10 Mar 2026 keeps non controlling beneficial ownership up to 10 percent on the automatic route.

RBI Circular No. 19 of 2024 lists land border approvals among the reclassification conditions. An FPI with such an owner and no approval cannot reclassify. It must sell the excess within five trading days.

Do foreign individuals and NRIs invest as FDI or FPI?

Since June 2026, any individual person resident outside India can buy listed Indian shares under Schedule III of the NDI Rules. Trades run through a designated AD bank on a repatriation basis. Before the change, the route was open only to NRIs and OCIs. An individual who breaches the limits must sell the excess within five trading days, unless RBI's reclassification framework applies.

Amended rule 12(1) lets "an individual person resident outside India" buy or sell listed equity instruments under Schedule III. Paragraph 6.3 of the Master Direction carries the new heading. Banks now report these trades in Form LEC (IFI) instead of LEC (NRI), under FEMA 395(4)/2026-RB of 13 Jun 2026.

The NDI (Third Amendment) Rules, 2026, S.O. 3030(E) of 12 Jun 2026, made the change. RBI applied it through A.P. (DIR Series) Circular No. 14 of 15 Jun 2026.

The Finance Ministry's release of 5 Jun 2026 gives the new limits. One individual may hold up to 10 percent of a company, up from 5 percent. All such individuals together may hold 24 percent, up from 10 percent.

Paragraph 7.3.3 of the Master Direction deals with a breach. The individual must sell the excess to an eligible resident within five trading days after settlement. Circular No. 14 adds that any reclassification to FDI follows RBI's framework, which is Circular No. 19 of 2024.

Which route suits a foreign parent setting up a subsidiary?

FDI. A new Indian subsidiary is an unlisted company, so rule 2(r) makes any equity investment in it FDI. The parent subscribes under Schedule I on the route its sector allows. The company files FC-GPR within 30 days of allotment and the FLA return each July.

FPI suits listed minority positions held by pension funds, mutual funds, insurers and corporate treasuries. It does not suit a parent that wants a board seat, a say in strategy or a subsidiary of its own.

Goal	Route	First filing	Source
Set up a wholly owned subsidiary or joint venture	FDI, Schedule I	FC-GPR within 30 days of allotment	Rule 2(r); regulation 4(1)
Buy shares of an unlisted company from residents	FDI	FC-TRS within 60 days, by the resident seller	Regulation 4(3)
Hold a liquid stake below 10% in listed companies	FPI, Schedule II	SEBI registration through a DDP	Rule 10(1); regulation 3
Take 10% or more of a listed company, no control	FDI by allotment or off market purchase; or FPI, then reclassify	FC-GPR or FC-TRS	MD Annex 1; RBI Circular No. 19 of 2024
Take control of a listed company	FDI with an open offer before 25%	FC-TRS; SAST filings	SAST regulation 3(1)
Invest as a foreign individual in listed shares	Schedule III through a designated AD bank	LEC (IFI), by the bank	Rule 12(1); FEMA 395
Investor from a land border country	Government route	Approval before investing	Rule 6(a)

Our FEMA compliance team runs these filings for foreign owned companies. For the subsidiary itself, read registering a subsidiary in India and the automatic route sector list.

What changed in 2026

Several 2026 instruments changed the FDI and FPI rules. The last two rows show the 2024 and 2025 changes they build on.

Area	Old rule	New rule	Date	Instrument
FPI tax regime	Section 115AD, Income Tax Act, 1961	Section 210, Income Tax Act, 2025	1 Apr 2026	Act 30 of 2025
FPI withholding	Section 196D	Section 393(2), serial 15; no deduction on gains under 393(4), serial 16	1 Apr 2026	Income Tax Act, 2025
Capital gains sections	111A, 112A, 112	196, 198, 197	1 Apr 2026	Income Tax Act, 2025
Dividend to a foreign company	Section 115A; withholding under section 195	Section 207(1); section 393(2), serial 17	1 Apr 2026	Income Tax Act, 2025
Treaty information form	Form 10F	Form 41, rule 75	1 Apr 2026	Income Tax Rules, 2026
Land border beneficial owner	Government route for any such beneficial owner	Beneficial owner read with PML rule 9(3); non controlling up to 10% automatic	2026	NDI (Amendment) Rules, 2026; Cabinet, 10 Mar 2026
SWAGAT-FI	Not available	Trusted investor category; ten year fee block	1 Jun 2026	SEBI (FPI) (Second Amendment) Regulations, 2025
Foreign individuals in listed shares	NRIs and OCIs only; 5% each, 10% aggregate; LEC (NRI)	Any individual person resident outside India; 10% each, 24% aggregate; LEC (IFI)	12 to 15 Jun 2026	S.O. 3030(E); FEMA 395(4)/2026-RB; RBI Circular No. 14 of 2026
Master Direction on Reporting	Earlier version	Replaced	23 Sep 2026	RBI
FPI fee	USD 2,500 and USD 250	INR 2,30,000 and INR 23,000 equivalent	3 Jan 2027	SEBI (FPI) (Amendment) Regulations, 2026
Earlier: reclassification	No procedure	Divest or reclassify in five trading days	11 Nov 2024	RBI Circular No. 19; SEBI Circular 2024/152
Earlier: granular disclosure	INR 25,000 crore equity AUM	INR 50,000 crore equity AUM	9 Apr 2025	SEBI circular 2025/52

Our note on the Income Tax Act, 2025 for foreign owned companies maps the other section changes.

Worked example

A Japanese manufacturer buys 12 percent of a listed Indian supplier through the stock exchange. It registers as a Category II FPI, crosses 10 percent in one block trade, and reclassifies to FDI. The figures are illustrative.

The supplier has 4,80,00,000 equity shares of INR 10 each in issue and 20,00,000 employee stock options outstanding. Its fully diluted capital is 5,00,00,000 shares. Assume its sector allows 100 percent FDI on the automatic route and trades settle on T+1.

Measure	Shares	Base used
Fully diluted capital	5,00,00,000	Explanation to rule 2(r)
FDI line (10%)	50,00,000	Fully diluted capital
Largest FPI holding	49,99,999	Below 10%
Target stake (12%)	60,00,000	Fully diluted capital
Same stake on issued shares	12.5%	4,80,00,000 shares
SAST 5% disclosure point	24,00,000	Voting capital, our working
Cost at an average of INR 800	INR 4,80,00,00,000	60,00,000 × 800

FEMA measures the 10 percent line on fully diluted capital. The takeover rules count voting rights on shares in issue, so the 5 percent disclosure arrives sooner.

Before the first trade, the company registers through a DDP. It opens two demat accounts with its custodian, one for portfolio holdings and one for FDI. It gets the supplier's written concurrence to reclassification. Japan shares no land border with India. Assume no beneficial owner is from such a country, so rule 6(a) needs no approval. It tells the custodian it intends to reclassify above 10 percent.

The company builds 49,80,000 shares over several weeks. It files the SAST disclosure at 24,00,000 shares and again at each change of more than 2 percent. On Day 0, a block trade of 10,20,000 shares at INR 805 takes it to 60,00,000 shares, or 12 percent. The trade settles on Day 1, and the custodian freezes further purchases.

After the freeze, the company cannot add on the exchange. Had it stopped at 10.06 percent, the rest would need off market purchases.

It now has five trading days from Day 1. To stay an FPI, it would sell 10,00,001 shares to get back to 49,99,999. At INR 798, that sale loses INR 70,00,007 before charges and ends the 12 percent plan. It reclassifies instead.

The date of reclassification is Day 0, and all 60,00,000 shares become FDI. RBI Circular No. 19 of 2024 makes the FPI report its entire holding in FC-TRS within the FEMA 395 timelines. Regulation 4(3) gives 60 days from transfer or receipt of funds, whichever is earlier. We count the 60 days from Day 0 to be safe. Once reporting is done, the custodian moves the shares to the FDI demat account.

The supplier now has FDI. If the breach falls in FY 2026-27, it files its first FLA return by 15 Jul 2027.

The supplier then declares a dividend of INR 12 a share, so the Japanese company receives INR 7,20,00,000.

Withholding basis	Rate	Tax withheld (INR)
India Japan treaty, Article 10(2), with TRC and Form 41	10%	72,00,000
Domestic rate, 20% plus 2% surcharge and 4% cess	21.216%	1,52,75,520

Serial 15 and serial 17 of section 393(2) both give 20 percent plus surcharge and cess, or the 10 percent treaty rate. So the dividend withholding is the same either way. The Act does not say whether section 210 still covers shares moved to the FDI demat account. Section 2(22)(b)(i) speaks of securities an FII invested in under SEBI regulations. Settle the position with your tax adviser and custodian before the first dividend, since it decides whether gains face withholding.

After 30 months, the company sells all 60,00,000 shares on the exchange at INR 1,100. The gain is INR 1,80,00,00,000, and it is long term.

Item	Amount (INR)
Sale proceeds	6,60,00,00,000
Gain	1,80,00,00,000
Exempt slice under section 198	1,25,000
Tax at 12.5%	22,49,84,375
Surcharge at 5% (income above INR 10 crore)	1,12,49,219
Cess at 4%	94,49,344
Total tax	24,56,82,938
Effective rate on the gain	13.65%

Article 13(3) of the India Japan treaty leaves the gain taxable in India. The company reports the sale in FC-TRS under regulation 4(3). Settle the withholding mechanics with the broker and custodian before the sale.

Common mistakes

1. Counting 10 percent on shares in issue. The test uses fully diluted capital. Fix: add every option, warrant and convertible to the denominator before setting a limit.
2. Ignoring the investor group. Funds with common ownership above 50 percent share one limit. Fix: map the group and give the custodian one combined limit.
3. Crossing 10 percent without approvals. RBI wants approvals and the investee's concurrence first. Fix: collect them, or cap the custodian limit at 9.9 percent.
4. Assuming the holding drops back to FPI. Once FDI, always FDI. Fix: plan the exit and any top up as FDI deals.
5. Buying on the exchange after reclassification. SEBI bars further portfolio investment, and FDI market buying needs control. Fix: use an allotment or an off market purchase.
6. Using an FPI licence for an unlisted company. Any unlisted stake is FDI. Fix: invest under Schedule I and have the company file FC-GPR.
7. Missing FC-TRS after reclassification. The shares cannot move to the FDI account until reporting is done. Fix: file early; late filings attract the fee in A.P. (DIR Series) Circular No. 16 of 2022.
8. Claiming the treaty rate without papers. Section 159(8) needs a TRC and Form 41. Fix: file Form 41 before the first dividend in each tax year.
9. Using the wrong holding period. Unlisted shares need over 24 months, listed shares over 12. Fix: check section 2(101) before timing a sale.
10. Missing the 5 percent takeover disclosure. It counts voting capital and often comes before the FEMA line. Fix: set a broker alert at 5 percent and at each change of more than 2 percent.

Checklist before a foreign company crosses 10 percent of a listed Indian company

1. Decide whether you want a passive stake or board influence.
2. Calculate 10 percent of post issue paid up equity capital on a fully diluted basis.
3. Map your investor group under regulation 22(3) of the SEBI FPI Regulations.
4. Confirm the sector's FDI cap and entry route.
5. Check whether any beneficial owner comes from a land border country.
6. Obtain any government approval before you buy past 10 percent.
7. Obtain the investee company's written concurrence.
8. Register as an FPI through a DDP and open FPI and FDI demat accounts.
9. Tell your custodian in writing that you intend to reclassify.
10. File SAST disclosures at 5 percent of voting rights and at each change of more than 2 percent.
11. Reclassify within five trading days of settlement of the breach trade.
12. File FC-TRS or FC-GPR and ask the custodian to move the shares.
13. Ask the investee company to report your holding in its FLA return by 15 July.
14. Collect your TRC and file Form 41 before the first dividend.

To test a planned stake against these rules, email [email protected] with the cap table and your investor group chart.

Frequently Asked Questions

Is an FPI the same as an FII?+

For tax, largely yes. SEBI replaced the FII regime with Foreign Portfolio Investors, now governed by the 2019 Regulations. Section 210 of the Income Tax Act, 2025 still says Foreign Institutional Investor. A government notification of 22 Jan 2014 brings SEBI registered FPIs within that term. Rule 2(u) of the NDI Rules still cites SEBI's 2014 Regulations.

Is FDI always a stake of 10 percent or more?+

No. In an unlisted company, any equity investment by a person resident outside India is FDI under rule 2(r) of the NDI Rules, even one share. The 10 percent test applies only to listed companies. An FDI holding that later falls below 10 percent stays FDI under paragraph 2.8.1 of the Master Direction.

Does an FPI need RBI approval to invest?+

No separate RBI approval is needed within the limits. The FPI registers with SEBI through a DDP under regulations 3 and 7(1) of the SEBI FPI Regulations. Rule 10(1) and Schedule II of the NDI Rules then allow listed investment. Government approval enters only for reclassification in a government route sector or a land border case.

Can an FPI subscribe to shares in an IPO?+

Yes. Rule 10(1) of the NDI Rules and regulation 20(1)(a) of the SEBI FPI Regulations both cover companies "listed or to be listed". The allotment counts towards the FPI's 10 percent limit and the aggregate limit. Equity bought in a private round before listing is FDI, because the company is still unlisted then.

What does "fully diluted basis" mean?+

The explanation to rule 2(r) of the NDI Rules counts all shares that would be outstanding if every source of conversion were exercised. That takes in employee stock options, warrants, and convertible preference shares or debentures. A larger denominator lets an investor hold more issued shares before reaching 10 percent.

What if the FPI misses the five day window?+

The second proviso to regulation 20(7) of the SEBI FPI Regulations treats the whole investment of the FPI and its investor group as FDI. The FPI may not make further portfolio investment in that company. RBI Circular No. 19 of 2024 is stricter where approvals or concurrence are missing. It says the excess "shall be compulsorily divested within the prescribed time". An excess left in place is a FEMA contravention, so take FEMA advice at once.

Can reclassification happen in any sector?+

No. A.P. (DIR Series) Circular No. 19 of 11 Nov 2024 bars reclassification in any sector prohibited for FDI. The holding must also respect the sector's entry route and cap, with government approval where needed. In a prohibited sector, the only fix for a breach is selling the excess within five trading days.

Who reports FPI trades to RBI?+

The AD Category I bank. Regulation 4 of FEMA 395/2019-RB makes banks report FPI purchases and transfers on Indian exchanges in Form LEC (FII). The FPI files FC-TRS only when it reclassifies market purchases as FDI under RBI Circular No. 19 of 2024.

Do FDI and FPI investors pay the same tax on listed shares?+

The rates match. Section 196 of the Income Tax Act, 2025 taxes short term gains on STT paid shares at 20 percent. Section 198 taxes long term gains above INR 1,25,000 at 12.5 percent. FPIs differ in regime, because section 210 applies and section 393(4) removes withholding on their gains.

What is the dividend withholding rate for an FPI?+

Section 393(2), serial 15 of the Income Tax Act, 2025 covers an FII's income from securities. Note 2 sets 20 percent, or a lower treaty rate where the FPI has furnished the section 159(8) certificate. The department's TDS rate chart adds surcharge and cess to the 20 percent. A Japanese FPI with a TRC and Form 41 faces 10 percent under Article 10(2) of the India Japan treaty.

What is SWAGAT-FI?+

Single Window Automatic and Generalised Access for Trusted Foreign Investors. The SEBI (FPI) (Second Amendment) Regulations, 2025 added it to regulation 2(r) from 1 Jun 2026. It covers government related investors and public retail funds. A SWAGAT-FI pays its fee for a ten year block instead of three, under regulation 7(6).

Which FPIs must give granular ownership details?+

Large and concentrated ones. SEBI circular SEBI/HO/AFD/AFD-POD-3/P/CIR/2025/52 of 9 Apr 2025 set the size trigger at INR 50,000 crore of Indian equity AUM. The earlier trigger was INR 25,000 crore. These FPIs make additional ownership disclosures. The FPI Master Circular of 30 May 2024 sets the full criteria.

Can an NRI or OCI register as an FPI?+

No. Regulation 4 of the SEBI FPI Regulations excludes resident Indians, NRIs and OCIs as applicants. Under regulation 4(c) they may contribute to an FPI's corpus, each below 25 percent and together below 50 percent, without control. For direct holdings, Schedule III of the NDI Rules offers a separate route.

Can a foreign individual buy Indian listed shares without FPI registration?+

Yes, since June 2026. Rule 12(1) of the NDI Rules, as amended by the NDI (Third Amendment) Rules, 2026, covers any individual person resident outside India. Purchases run on a repatriation basis under Schedule III through a designated AD bank. The bank reports them in Form LEC (IFI).

Does the 10 percent test apply to preference shares and warrants?+

Yes, series by series. Rule 2(t) of the NDI Rules tests 10 percent of the paid up value of each series of equity instruments. Equity instruments include convertible preference shares, convertible debentures and share warrants. Check each series as well as the ordinary shares.

Sources

• Reserve Bank of India, Foreign Exchange Management (Non Debt Instruments) Rules, 2019, as updated on rbi.org.in (rules 2(r), 2(s), 2(t), 2(u), 6(a), 10(1), 12(1) and 23), https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083
• Reserve Bank of India, Master Direction on Foreign Investment in India, updated as on 15 Jun 2026 (paras 2.8, 2.8.1, 2.9, 5.1.4, 6.2, 6.3, 7.1.4, 7.3.3 and Annex 1 para 1.2), https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11200
• Reserve Bank of India, Operational framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment, A.P. (DIR Series) Circular No. 19 (RBI/2024-25/90), 11 Nov 2024, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12749&Mode=0
• Reserve Bank of India, Liberalisation of Foreign Portfolio Investment under Schedule III of the NDI Rules, A.P. (DIR Series) Circular No. 14 (RBI/2026-27/114), 15 Jun 2026, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=13483&Mode=0
• Reserve Bank of India, Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019, FEMA 395/2019-RB, as amended by FEMA 395(3)/2025-RB of 15 Jan 2025 and FEMA 395(4)/2026-RB of 13 Jun 2026, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0
• Reserve Bank of India, Master Direction on Reporting under FEMA, updated as on 23 Sep 2026, https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10202
• Reserve Bank of India, Late Submission Fee for reporting delays under FEMA, A.P. (DIR Series) Circular No. 16, 30 Sep 2022, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12393&Mode=0
• Securities and Exchange Board of India, SEBI (Foreign Portfolio Investors) Regulations, 2019, last amended on 7 Jul 2026, https://www.sebi.gov.in/legal/regulations/jul-2026/securities-and-exchange-board-of-india-foreign-portfolio-investors-regulations-2019-last-amended-on-july-07-2026-_102902.html
• Securities and Exchange Board of India, consolidated text of the FPI Regulations as amended to 7 Jul 2026 (regulations 2(r), 3, 4, 5, 7, 20 and 22 and the Second Schedule), https://www.sebi.gov.in/sebi_data/attachdocs/aug-2026/1785911821382.pdf
• Securities and Exchange Board of India, Procedure for reclassification of FPI investment to FDI, SEBI/HO/AFD/AFD-POD-3/P/CIR/2024/152, 11 Nov 2024, https://www.sebi.gov.in/legal/circulars/nov-2024/procedure-for-reclassification-of-fpi-investment-to-fdi_88329.html
• Securities and Exchange Board of India, Amendment to Circular for mandating additional disclosures by FPIs that fulfil certain objective criteria, SEBI/HO/AFD/AFD-POD-3/P/CIR/2025/52, 9 Apr 2025, https://www.sebi.gov.in/legal/circulars/apr-2025/amendment-to-circular-for-mandating-additional-disclosures-by-fpis-that-fulfil-certain-objective-criteria_93399.html
• Securities and Exchange Board of India, SWAGAT-FI framework for FPIs and FVCIs, HO/19/34/14(5)2025-AFD-POD2/I/2703/2026, 16 Jan 2026, https://www.sebi.gov.in/legal/circulars/jan-2026/single-window-automatic-and-generalised-access-for-trusted-foreign-investors-swagat-fi-framework-for-fpis-and-fvcis_99107.html
• Securities and Exchange Board of India, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, last amended on 5 Dec 2025 (regulations 3(1) and 29), https://www.sebi.gov.in/legal/regulations/dec-2025/securities-and-exchange-board-of-india-substantial-acquisition-of-shares-and-takeovers-regulations-2011-last-amended-on-december-5-2025-_98643.html
• Income Tax Department, Income Tax Act, 2025 as amended by the Finance Act, 2026 (sections 2(22), 2(67) and 2(101)), https://www.incometaxindia.gov.in/documents/d/guest/income_tax_act_2025_as_amended_by_fa_act_2026-pdf
• Income Tax Department, Section 393, Income Tax Act, 2025 (section 393(2) serials 15 and 17 with Note 2; section 393(4) serial 16), https://www.incometaxindia.gov.in/w/section-393-5
• Income Tax Department, Frequently Asked Questions on FIIs exemption (section 210 of the Income Tax Act, 2025), https://www.incometaxindia.gov.in/documents/20117/43120/FAQs-on-BIS-Exemption.pdf/9da26c02-ca75-855f-48cf-e3b7fbef53e3
• Income Tax Department, FAQs on Tax Deducted at Source (rates for non domestic companies, tax year 2026-27), https://www.incometaxindia.gov.in/documents/d/guest/faqs-on-tax-deducted-source
• Income Tax Department, FAQs on Computation of Tax (surcharge for tax year 2026-27), https://www.incometaxindia.gov.in/documents/d/guest/faqs-on-computation-of-tax
• Income Tax Department, Section 115AD, Income Tax Act, 1961 (rates before 1 Apr 2026), https://www.incometaxindia.gov.in/w/section-115ad-32
• Income Tax Department, India Japan DTAA (Articles 10(2) and 13(3); protocol S.O. 1136(E) of 19 Jul 2006), https://www.incometaxindia.gov.in/w/japan-comprehensive-agreements-1
• Press Information Bureau, Ministry of Finance, release on liberalisation of investment by individual persons resident outside India, 5 Jun 2026, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269169&reg=3&lang=1
• Securities and Exchange Board of India, adjudication order of 31 Oct 2018 reproducing regulations 29(1) to 29(3) of the SAST Regulations, https://www.sebi.gov.in/sebi_data/attachdocs/nov-2018/1541065262647.pdf
• Press Information Bureau, Cabinet approves changes in guidelines on investments from countries sharing land border with India, 10 Mar 2026, https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2237806