Foreign Portfolio Investment (FPI) regulations govern overseas investors buying Indian securities without active management control. SEBI's FPI framework categorizes investors into Category I (low-risk entities like sovereign funds, central banks), Category II (broad-based funds, appropriately regulated entities), and Category III (all other investors). Each category has different investment limits, compliance requirements, and sectoral caps. FPIs must register with designated depository participants, maintain beneficial ownership disclosures, and adhere to aggregate sectoral limits of 24% in most sectors, extendable to sectoral caps.

SEBI's FPI framework balances capital inflows with market stability concerns. Category I FPIs (sovereign funds, central banks, multilateral agencies) face minimal compliance burden due to their regulatory oversight and long-term investment approach. Category II encompasses appropriately regulated broad-based funds, university funds, and pension funds - the largest FPI segment by volume. Category III covers all others, including family offices and closely-held entities, facing stricter compliance. The framework prevents concentrated ownership by capping individual FPI holdings at 10% of company shares, while aggregate FPI limits vary by sector - 24% for most sectors, higher for specific industries like private banking (74%) and defense (49% under approval route). Beneficial ownership disclosure requirements at 25% threshold prevent shell companies and ensure transparency. The system channels foreign capital while maintaining domestic control over strategic sectors, supporting India's capital market depth without compromising financial sovereignty.