The Business Bytes
Mumbai, November 11, 2024 (TBB Bureau): The Reserve Bank of India (RBI) has introduced an operational framework allowing foreign portfolio investors (FPIs) to reclassify their holdings as foreign direct investment (FDI) if they breach the stipulated investment limit. This regulatory move aims to streamline foreign investments and ensure compliance with sectoral FDI policies.
Currently, FPIs are restricted to holding less than 10% of the total paid-up equity capital on a fully diluted basis in an Indian company. If this limit is breached, the FPI has the option to either divest its excess holdings or reclassify them as FDI, provided they comply with guidelines set by the RBI and the Securities and Exchange Board of India (Sebi). The reclassification or divestment must be completed within five trading days following the settlement of the trade that caused the limit to be exceeded.
According to the framework, the FPI in question will need to secure relevant government approvals and the concurrence of the Indian investee company to proceed with reclassification. However, the RBI has clarified that reclassification will not be permitted in sectors where FDI is prohibited.
Further, the RBI has mandated that the entire investment held by the FPI should be reported in accordance with the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Once the reporting is complete, the FPI must submit a request to its custodian to transfer the equity instruments of the Indian company from its demat account designated for FPI to the demat account maintained for FDI holdings.
This framework, which became effective immediately upon issuance, is anticipated to facilitate more transparent and efficient foreign investment management in the country, bolstering India’s appeal as a preferred investment destination while ensuring adherence to FDI policies.
