The paradox of rising FPI inflows, falling FPI registrations

Market experts pinned the steep decline in registrations on global economic headwinds, while pointing out that FPIs already in India have delivered stellar returns in recent years.

Only 167 offshore funds set up shop in India this year, down from 604 in 2022, show data compiled from the Securities and Exchange Board of India. The last time FPI registrations were at this year’s level was in 2019, at 169.

India, however, has been receiving robust foreign inflows, outperforming other emerging markets. In 2023, India received net FPI inflows amounting to ₹2.3 lakh crore, of which ₹1.6 lakh crore was from equities—the best since 2020 when foreign funds pumped ₹1.7 lakh crore into India.

Combining equity and debt flows from FPIs, 2023 has been the best year since 2014, when India witnessed offshore investments to the tune of ₹2.5 lakh crore, depository data show.

Market experts said that with big global firms such as Blackrock, Fidelity and JP Morgan already managing several funds with India exposure, offshore fund managers may not be inclined to establish more investment vehicles in the country.

“This reduces the need for trustees to set up new investment vehicles that need to register with Sebi for running an India-dedicated fund," said UR Bhat, co-founder, Alphaniti Fintech. “Besides, these funds are receiving greater flows, which to an extent obviates the need for a greater number of India-dedicated funds."

Suresh Swamy, partner, Price Waterhouse and Co LLP, said although new fund registration data may seem subdued, newer opportunities are emerging in India.

“We are witnessing an encouraging trend of first-time fund managers setting up in International Finance Services Centre (IFSC), GIFT City, which should also be factored into the overall tally," he said. 

“Alongside this, there are numerous funds currently in the pipeline, and we anticipate a surge in debt funds driven by the India bond inclusion factor."

Regulatory experts said the global fund industry is grappling with multiple headwinds including potential interest rate hikes and a slowdown in the technology startup space.

“I think the slowdown in new FPI registrations is largely due to global headwinds and not a reflection of the Indian growth trajectory. In the medium- to long-term, FPI inflows should continue to accelerate due to multiple positive factors unique to India," said Rajesh Gandhi, partner, Deloitte India.

“While we have seen heightened interest from newer countries like the UAE and Russia, I feel the bulk of incremental inflows will continue to come from the US and Western Europe."

Off-shore investors may also be opting to enter India through FPIs already in the country, given their performance in recent years, said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies.

“The fact of near-record FPI investments this year could imply that existing funds are attracting more money from foreigners to invest into Indian markets, obviating the need for new funds, which could explain the drastically lower FPI registrations," he said.

New FPI registrations typically are a function of two major factors in India: relative performance of the Indian market, and the regulatory landscape. 

While India has largely outperformed emerging markets in the past decade, regulatory factors such as obtaining licences and taxation remain major concerns.

In 2019, the market regulator ushered several major policy changes that significantly simplified the FPI registration process in India. Importantly, Sebi in collaboration with the government laid down a framework for a single-window clearance for FPI licences.

Earlier, off-shore funds had to deal separately with multiple regulators including Sebi, the Reserve Bank of India, and the tax department. 

Sebi has also simplified the FPI registration process by doing away with several unnecessary compliance requirements.