P0009 Purpose Code
According to the RBI, it is for transactions related to “Foreign portfolio investment in India in equity shares.”
P0009 is used when a foreign investor sends money to India to buy shares of Indian companies listed on the stock exchange, like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). These investors do not want to control or run the company but are just investing to earn profits from share price movements or dividends. It is like buying a small piece of a company for investment purposes.
For Example, an investor from Germany wants to buy shares of Indian companies like TCS and ICICI Bank, which are listed on the Indian stock exchange. They register as a Foreign Portfolio Investor (FPI) and send Rs. 50 lakhs to India through their bank. While sending the money, the bank uses Purpose Code P0009 to indicate that the funds are for investing in equity shares in India as a portfolio investment.
What an FPI Can Invest In Within a Company?
They can invest in listed financial instruments of a company, but cannot take control or get involved in management. Here’s what an FPI can typically invest in:
- Equity Shares – FPIs can invest in these shares, but their holdings are typically restricted to a certain limit, usually up to 10 per cent of the total paid-up capital of a company per FPI. This limit helps regulate foreign ownership and maintain market stability.
- Equity Shares (Unlisted) – FPIs can invest in unlisted equity shares only in specific cases, like during an Initial Public Offering (IPO) or private placement, if allowed by SEBI and RBI. The company must later get listed, and the FPI can then hold or trade the shares as per the rules.
- Convertible Debentures (Fully or Partially Convertible) – Convertible debentures are a type of investment where the investor first gives a loan to a company, and instead of being repaid in cash, the loan amount can later be converted into shares of that company. There are two types: fully convertible, where the entire amount turns into shares, and partially convertible, where only a part of the amount gets converted and the rest is paid back as a loan. This gives the investor the benefit of earning interest like a loan in the beginning, and later becoming a part-owner of the company when the conversion happens.
- Preference Shares – Preference shares are a type of investment where the investor gets a fixed return (like interest) instead of regular share profits. Non-participating preference shares mean the investor will not get extra profits even if the company does really well; they will only receive the fixed return agreed upon. These shares are safer than regular shares because the investor gets paid before regular shareholders if the company distributes profits or shuts down. However, the investor does not have voting rights or a say in how the company is run.
- Exchange-Traded Funds (ETFs) (Equity Based) – These are funds that hold a collection of company shares and are traded on Indian stock exchanges like regular stocks. Under Purpose Code P0009, Foreign Portfolio Investors (FPIs) can invest in these ETFs to gain exposure to a broad range of equities, helping diversify their investment and reduce risk.
- Equity Mutual Fund Units – These are investment products where a foreign investor puts money into a mutual fund that mainly invests in shares (stocks) of Indian companies. These mutual funds are managed by professional fund managers, and the investor doesn’t need to pick individual stocks. Foreign Portfolio Investors can invest in these equity mutual fund units to gain exposure to the Indian stock market without directly buying company shares. The value of the investment goes up or down based on how the stocks in the fund perform.
- Derivatives – Equity & Index (Futures & Options) – Foreign investors can also invest in stock market contracts called derivatives, like futures and options. These are special financial tools that let them earn profits based on the future price movements of shares or the stock market as a whole. For example, they can make money if a stock goes up or down, without actually owning the stock. But they must trade these only on official Indian stock exchanges like NSE or BSE, and only within limits set by SEBI, which is the market regulator. These limits are there to keep the market safe and prevent risky bets.
- Limited or Restricted Investment – Investments are restricted to financial instruments such as shares and convertible securities. Foreign investors are not permitted to invest in debt instruments like bonds or loans, as these fall under different regulations, specifically coded as P0007. Moreover, the purchase of real estate and agricultural land is prohibited under this code. Moreover, investors operating under P0009 cannot take control of or manage the companies in which they invest. Such management involvement is only allowed under Foreign Direct Investment (FDI), not Foreign Portfolio Investment (FPI).
- Depository Receipts – Depository Receipts, such as Global Depository Receipts (GDRs) and American Depository Receipts (ADRs), are financial instruments that allow foreign investors to invest in Indian companies without buying shares directly on Indian stock exchanges. Instead, Indian companies issue shares to a bank, which then issues GDRs or ADRs to investors in foreign markets. However, these are rarely issued as they are mostly governed by separate rules under FEMA of the RBI.
- Portfolio Investment Scheme (PIS) (Then and Now) – PIS was an RBI-regulated scheme that allowed NRIs and PIOs to invest in listed shares and convertible debentures of Indian companies through a designated bank account. Under this scheme, any remittance made for such investments was reported under Purpose Code P0009. Though the PIS has now been discontinued and replaced by a framework under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, NRIs still use P0009 to report funds remitted for investing in listed Indian equity through their trading and demat accounts. Thus, P0009 continues to apply to these types of equity investments made by foreign investors, including NRIs.
Important Rules for Investing
- Investment Must Be Lawful – This means that the investor must follow the guidelines outlined under the Foreign Exchange Management Act (FEMA), as laid down by the RBI.
- Use of Proper Banking Channels – Foreign investors must transfer funds through proper banking channels, using international systems like SWIFT (Society for Worldwide Interbank Financial Telecommunication). The remittance must go through an Authorised Dealer (AD) bank in India to ensure transparency and compliance with RBI and FEMA rules.
- Use and Reporting Responsibilities – The responsibility of reporting FPI investments under Purpose Code P0009 to the RBI lies with the authorised dealer (AD) bank in India. When a registered FPI sends funds to invest in Indian equity markets, the custodian reports the transaction via the RBI’s FIRMS portal. While the investor does not report directly, they must ensure compliance with SEBI and RBI regulations.
- Registering As An FPI – The investor must be registered with SEBI as a Foreign Portfolio Investor (FPI) through a Designated Depository Participant (DDP).
- Time Limit – There is no specific reporting timeline for the foreign investor, as they are not required to report directly to the RBI. However, the custodian bank or authorised dealer (AD) bank in India must adhere to a timeline of generally within 5 working days (excluding Saturdays, Sundays, and declared public holidays) from the date of the transaction to update the details of fund receipt and securities purchased through the RBI’s FIRMS portal.
- Investment Limits – FPI is allowed to invest up to 10% of the total paid-up capital of a listed Indian company. However, all FPIs combined cannot exceed the sectoral limit set by the Reserve Bank of India (RBI) for that industry. In private sector banks, total FPI investment cannot go beyond 74% of the company’s total capital. These rules help ensure that foreign investors don’t gain control or majority influence in Indian companies.
– Sector-Wise Limits (as per FEMA & FDI Policy): Sectoral caps under P0009 include 74% for private sector banks, 20% for public sector banks, 49% for insurance and pension, 100% for telecom, 100% for greenfield pharmaceuticals, 74% for brownfield pharmaceuticals, 49% for civil aviation (airlines), 51% for multi-brand retail, 100% for single-brand retail, 100% for real estate (construction), and up to 74% (automatic) or 100% (with government approval) for defence.
How to Report the Purpose of The Transaction to The RBI by Giving the Purpose Code:
Investors investing money in India must file several forms before starting the process. Usually, the transactions are via bank transfers, and your bank will ask you to provide a purpose code by giving a form to fill out. If you have any doubts or questions, feel free to reach out to us via email- support@bankerpanda.com, and we will try our best to help you out.
Tax or No Tax?
There is no tax in India on the capital amount sent by an FPI for investment in an Indian company under Purpose Code P0007 (FDI in equity shares). This is because the remitted amount is treated as capital, not income, and is therefore not taxable under Indian income tax laws at the time of investment. While the Indian company receiving the funds must comply with FEMA and RBI regulations, such as reporting the transaction and issuing shares within prescribed timelines, no tax is levied on the capital amount received through FDI. Important exemption laws under DTAA and the Liberalised Remittance Scheme (LRS) are also not applicable in this case.
P0009 Purpose Code Use Case Examples:
Here are some real-life examples where the RBI’s Purpose Code P0009 would be used to report transactions in India:-
- US-Based Investment Fund Buys Indian IT Stocks:-
A US-based investment fund registers as an FPI with SEBI. It sends $10 million to India through an authorised dealer bank using Purpose Code P0009. The fund uses this money to buy shares of Infosys and TCS on the Indian stock exchange. Since these companies have shares listed on the Indian stock exchange as eligible equity instruments, the transactions are reported under the code.
- Sovereign Wealth Fund Invests in Private Banks:-
A sovereign wealth fund from Singapore invests in HDFC Bank and ICICI Bank. The fund stays within the 10 per cent limit per company and ensures total FPI investment in these banks remains under the 74 per cent sectoral cap for private sector banks. The fund earns dividends and capital gains, which are taxed according to Indian laws but can be repatriated freely.
- A UK-based Pension Fund Invests Through ETF:-
A UK-based pension fund invests in India by purchasing units of an Equity Exchange-Traded Fund (ETF) that tracks the Nifty 50 index. The ETF includes shares of Indian companies. The investment is made through the portfolio route and reported under P0009.
- Japanese Asset Management Company Buys IPO Shares:-
A Japanese asset manager participates in the initial public offering (IPO) of an Indian startup in the fintech sector. They remit funds to India and subscribe to equity shares during the IPO. Since the shares are listed post-issue, the transaction falls under FPI investment and is reported under P0009.
- Canadian Investor Buys Listed Convertible Debentures:-
A Canadian investor buys listed, convertible debentures of an Indian pharma company. These are debt instruments that can later be converted into equity of the company. As long as they are listed and meet SEBI rules, such investments are covered under P0009.
- NRI in the USA Invests via a Brokerage Account:-
An NRI living in the U.S. opens a trading account with an Indian stockbroker registered with SEBI as a Portfolio Investment Scheme (PIS) provider. Through their NRE/NRO account, they invest ₹5 lakhs in shares of Reliance Industries and HDFC Ltd. The funds are sent to India and reported under P0009, as these are listed equity shares. Any future profits from selling the shares are subject to capital gains tax in India.
- Foreign Retail Investor Buys Shares through Global Trading Platform:-
A retail investor in Germany uses a global brokerage that provides access to Indian markets via registered FPI intermediaries. The investor buys ₹3 lakhs worth of listed shares in Indian companies like Infosys and Titan. The remittance for the share purchase is routed through the broker’s authorised dealer bank in India using P0009.
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