SWAGAT-FI: A Case for Principled Liberalization of Foreign Portfolio Investments

[Saif is a student at National Law School of India University.]

On 8 August 2025, the Securities and Exchange Board of India (SEBI) issued a consultation paper inviting public comments on the introduction of the Single Window Automatic and Generalized Access for Trusted Foreign Investors (SWAGAT-FI) framework for foreign portfolio investment (FPI) and foreign venture capital investment (FVCI). This framework aimed to relax the onboarding compliance of specific low-risk category FPIs or the SWAGAT-FI. According to SEBI, these guidelines are in furtherance of the previous liberalization of FPIs. SEBI claimed that such measures have previously enhanced foreign access to capital, with registered FPIs in India rising to 11,913 and assets under custody reaching INR 80.83 lakh crore by June 2025. In this regard, the blog demonstrates that the recent preferential liberalization for SWAGAT-FI is based on an unsubstantiated and unconnected rationale, which blurs the causal link between the regulatory intervention and its stated objective of facilitating foreign capital inflows, hence underscoring the need for a more principled liberalization.

What is SWAGAT-FI?

SEBI proposed to define SWAGAT-FI by adding Regulation 2(t) to the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2019 (FPI Regulations) as government and government-related investors under Regulation 5(a)(i) and public retail funds as defined under Regulation 22(4) of the FPI Regulations. FPIs defined under Regulation 5(a)(i) are Category-I FPIs, which include “(i) Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies, including entities controlled or at least 75% directly or indirectly owned by such Government and Government related investor(s)” (Government FPIs).

Regulation 22(4) includes appropriately regulated public retail funds that are, “(i) mutual funds or unit trusts which are open for subscription to retail investors, and which do not have specific investor type requirements like accredited investors; (ii) insurance companies where a segregated portfolio with one-to-one correlation with a single investor is not maintained; and (iii)pension funds” (Public Retail Funds). This definition for SWAGAT-FI is proposed to be used for Securities and Exchange Board of India (Foreign Venture Capital Investor) Regulations 2000 through the addition of Regulation 2(ki).

What are the Regulatory Interventions?          

First is the introduction of a single window for FPI and FVCI registration. SWAGAT-FI, either applying afresh or already registered as FPIs, will be allowed to register as FVCIs without submitting additional documentation. Since SWAGAT-FI are already FPIs, SEBI claimed that their onboarding into alternative investment funds is smoother, as they already meet conditions such as being IOSCO signatory jurisdictions, not under UN sanctions, and not from FATF-blacklisted countries.

Second is a longer periodicity for registration and KYC review. Through SWAGAT-FI, both registration renewal and KYC review will shift to once every 10 years. This aligns with the RBI’s KYC framework for low-risk customers. However, the obligation to report any material changes remains in effect.

Third is relaxation for the participation of non-resident individuals (NRI), overseas citizens of India (OCI), and resident Indians (RI). Currently, aggregate contribution from NRIs, OCIs, and RI individuals in an FPI is capped at 50% of the corpus. For SWAGAT-FI, this cap will be removed; however, this will not apply to FVCIs.

Fourth is the option for a single demat account. Currently, FPIs and FVCIs are required to maintain separate demat accounts for their securities. SWAGAT-FI may optionally use a single demat account to hold securities acquired under FPI, FVCI, and investment vehicle units.

Is the Preferential Liberalization New?

The preferential liberalization for FPIs falling under the SWAGAT-FI is not a new phenomenon. Government FPIs, alongside other Category I FPIs defined under Regulation 5(a) of the FPI Regulations, such as pension funds and university funds, enjoy such exceptions. For example, Regulation 21 of the FPI Regulations only allows Category I FPIs to deal in the offshore derivative investment (ODI) with only the persons eligible for Category I FPI registration. 

Apart from the general exceptions for Category I FPIs, there are a few exceptions specifically for Government FPIs. The master circular for FPIs exempts Government FPIs from providing beneficial owners (BOs) details. This exemption is extended even to Government FPIs that belong to the high-risk jurisdiction, whereas the materiality threshold for other FPIs for BO in a high-risk jurisdiction is as low as 10%. Furthermore, while other high-risk Category I FPIs are required to undergo KYC on an annual basis, Government FPIs are only required to complete KYC once every 3 years. 

Public Retail Funds, under Regulation 22(4) of the FPI Regulations, enjoy the exception from clubbing of investment limits from different entities even if they are commonly controlled. Moreover, this is not even the first time both Government FPIs and Public Retail Funds have been given an exception together. In August 2023, and further, in December 2024, SEBI mandated FPIs and ODI subscribers, respectively, having assets under management (AUM) holding over 50% of their Indian equity in a single corporate group or having equity AUM above INR 25,000 crore to make granular disclosures of BOs. In both cases, FPIs and ODI subscribers that qualified as either Government FPIs or Public Retail Funds were exempted.

Talking One Way, Acting Another 

In addition to the domestic practice, preferential liberalization of government-owned foreign funds has precedence globally as well. Section 13 of the Singapore Income Tax Act 1947 provides tax exemptions for “approved foreign government-owned entity” and “prescribed sovereign fund entity.” Further, on streamlining the onboarding, China consolidated qualified foreign institutional investors (QFIIs) and Renminbi QFIIs (RQFIIs) into a single qualified foreign investor (QFI) regime. Through simplification of the application process, this reform was aimed at attracting more SMS overseas institutional investors. More importantly, what must be inquired into for a more legitimate assessment is SEBI’s own rationale, its connection to the regulatory intervention, and the causal link between the intervention and the stated objective. 

First, despite the past practice of preferential liberalization, any clear rationale has hitherto been absent. Although it was touched upon in the August 2023 circular, this was the first instance in which SEBI explicitly claimed that Government FPIs and Public Retail Funds, through concentrated and regulated holdings, have less likelihood of breaching minimum public shareholding (MPS) requirements or triggering SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (SAST Regulations). While laying out the rationale is welcome, it still requires more evidence to establish the link between the large and regulated pools of funds and the low risk of breaching MPS and SAST Regulations. Instead of merely relying on the broad principles of government ownership and good governance, it is more effective to support the rationale with empirical data showing how many breaches SWAGAT-FI have made compared to other FPIs.

Second, the present intervention is confined to the procedural onboarding of SWAGAT-FI, which is a clear departure from earlier liberalizations that addressed the operational functioning of FPIs in relation to issuance and disclosure. Safeguards such as MPS and SAST are designed to regulate investment concentration and disclosure in ongoing operations, not the initial process of registration or onboarding. Linking the supposed lower likelihood of breaching these safeguards to the relaxation of onboarding requirements is therefore misplaced. Onboarding has its own administrative rationale, centered on ensuring traceability, compliance, and supervisory ease at the entry stage. 

Third, a mismatch between the rationale and intervention blurs the causal link between the stated objective. For instance, SEBI’s proposal to allow single combined demat accounts for both FPIs and FVCIs has raised concerns regarding the co-mingling of securities acquired through various routes, and their effective monitoring and supervision.  SEBI put the mandate on depositories to provide for adequate tagging for the public to identify the investment as FPI or FVCI. In the registration of FPIs, depositaries already have a comprehensive mandate of checking the category of FPIs, along with the identification and verification of BOs. 

Here, the administrative cost associated with the additional mandate of identifying every investment as FPI and FVCI by the depository, especially when there are high-stakes risks associated with non-compliance, outweighs the relaxation provided from the marginal cost in opening one more demat account by the FPIs. Such knee-jerk easing measures risk creating administrative and legal complexities that may, paradoxically, erode investor confidence. This illustrates how a misaligned intervention, relaxing onboarding procedures, can decouple from, and even undermine, the broader objective of increasing foreign capital inflows. Indeed, when China streamlined QFIIs and RQFIIs into a unified QFI regime, it deliberately discouraged pooled accounts to avoid precisely such complications.

Conclusion: A Case for Principled Liberalization

SEBI, in February 2025, released the regulation for the process of regulation-making to increase transparency and, inter alia, mandated stakeholder consultation and a statement of the regulatory intent and objectives of the proposed regulations. However, as noted, merely articulating the objective without committed engagement with the underlying rationale and the chosen intervention can result in the objective being realized in foreseeably unintended ways. This turns us towards the need to develop the practice of principled regulatory intervention for achieving greater transparency and democratic stakeholder involvement. In this regard, Natasha Agarwal, aligning with the global best practices in the USA and the EU, went a step further and developed a four-pronged approach, where SEBI should identify the market failure, demonstrate how the regulation will address such failure, conduct a cost-benefit and benefits analysis, and design a system to monitor and evaluate its impact. Considering the shortcomings reflected in the blog, this approach can serve as a guiding light for future SEBI consultation papers.