RBI introduces framework for reclassification of FPI to FDI
- The new framework aims to streamline foreign investments, offering FPIs a compliant route to maintain stakes in Indian firms above the 10% cap.
The Reserve Bank of India (RBI) on Monday introduced a streamlined operational framework to allow foreign portfolio investors (FPIs) to convert their investments to foreign direct investment (FDI) when equity holdings in Indian companies surpass the prescribed 10% limit.
This regulatory shift addresses scenarios where an FPI, along with its investor group, inadvertently crosses the threshold, providing a structured path to retain the investment under India’s FDI guidelines.
Under current regulations, FPIs can hold a maximum of 10% of an Indian company’s total paid-up equity capital. Exceeding this cap previously left FPIs with two choices: divesting the surplus shares or reclassifying them as FDI. The RBI’s new framework mandates that this reclassification be finalized within five trading days following the transaction that breaches the limit, subject to approvals from both the Indian government and the invested company.
Reclassification will be barred in sectors where FDI is restricted.
To ensure compliance, the RBI requires full reporting under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. After fulfilling these reporting obligations, the FPI must direct its custodian to transfer the equity instruments from its FPI-designated demat account to one set up specifically for FDI holdings.
Jyoti Prakash Gadia, managing director at Resurgent India, a financial advisory firm, commented that the RBI’s framework brings clarity and transparency, particularly as FPIs strive to adhere to the 10% ceiling on paid-up equity capital.
He emphasized that this guidance applies exclusively to sectors where FDI is allowed, ensuring that each industry’s specific approval and limit requirements remain intact. “The operational framework announced by RBI is thus essentially to provide guidance to the FPIs while opting for reclassification from FPI to FDI so that proper compliances are ensured without any dilution of the basic structure of FDI scheme and rules prescribed in this respect."
This RBI's move complements a similar update from the Securities and Exchange Board of India (Sebi), which had revised its own guidelines for FPI-to-FDI reclassification.
Effective 30 May 2024, Sebi’s procedures require FPIs to comply with the Foreign Exchange Management Act (FEMA) and other relevant regulations when opting for reclassification. Sebi mandates that once an FPI exceeds the 10% equity threshold, it may opt to convert the holdings to FDI, provided it meets all regulatory criteria.
Under Sebi’s revised guidelines, any FPI choosing reclassification must notify its custodian, who will freeze further equity transactions in the company until the conversion process concludes. The custodian will then facilitate the transfer of securities to the designated FDI account, ensuring compliance with all reporting requirements.
Key Takeaways
- The RBI’s new framework simplifies the conversion process from FPI to FDI for investments exceeding the 10% threshold.
- Reclassification must be completed within five trading days and is subject to both government and company approvals.
- This regulatory change aims to enhance clarity and transparency for foreign investors in the Indian market.
Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
Business NewsIndustryRBI introduces framework for reclassification of FPI to FDI
First Published:11 Nov 2024, 08:17 PM IST
- Top Gainers
- Top Losers
- 52 Week High