RBI issues new framework for reclassification of FPI to FDI

Highlights:

• The Reserve Bank of India (RBI) has issued new directives for foreign portfolio investors (FPIs) to ensure compliance when their equity holdings exceed prescribed limits and are reclassified as foreign direct investment (FDI).

Key Regulations and Limits

FEM (NDI) Rules, 2019:

• FPIs’ investments should remain below 10% of the total paid-up equity capital (on a fully diluted basis).
• Exceeding this limit requires FPIs to either:
• Divest the excess holdings within five trading days, or
• Reclassify the holdings as FDI.

Steps for Reclassification to FDI

Government Approvals:

• FPIs must secure necessary government approvals, including special permissions for investments from land-bordering countries.
• Investments must comply with FDI rules, including:
  • Entry routes
  • Sectoral caps
  • Pricing guidelines
  • Sectoral restrictions

Concurrence of the Investee Company:

• The Indian company receiving the investment must ensure compliance with:
  • Prohibited FDI sectors
  • Sectoral caps
  • Government approvals

Intent and Documentation:

• FPIs must articulate their intent for reclassification and provide:
  • Necessary approvals.
  • Written concurrence from the Indian investee company.

Custodian’s Role:

• FPIs must submit documents to their Custodian, who will:
  • Freeze purchase transactions in equity instruments of the Indian company until reclassification is complete.
  • Restrictions
  • Reclassification of foreign portfolio investments into FDI is not permitted in sectors where FDI is prohibited.

Implications for FPIs and Companies:

• Compliance Burden: FPIs and investee companies must adhere strictly to FDI regulations, particularly in sensitive sectors.
• Time-Sensitive Divestments: Breaches must be addressed within five trading days, adding urgency for compliance.
• Transparency in Intent: Clear communication and documented intent for reclassification are essential for regulatory adherence.

Prelims Takeaways

• foreign direct investment (FDI).