RBI rolls out rules to convert FPI to FDI

The Reserve Bank of India (RBI) on Monday introduced an operational framework allowing foreign portfolio investors (FPIs) to reclassify their investments as foreign direct investment (FDI) after they exceed the prescribed limit of 10% of a company’s total paid-up equity capital.

This framework will provide a structure for FPIs to manage their investments while adhering to regulatory requirements.

The market regulator, the Securities and Exchange Board of India (Sebi), issued a circular sharing information about the procedure for the reclassification of FPI investments to FDI on 11 November.

The circular shares information on the steps that FPIs need to take when their investments reach or exceed the 10% threshold of a company’s total paid-up equity capital.

As per the rule, FPIs with its investor group can invest up to 10% of the total paid-up equity capital on fully diluted basis.

In case if an FPI breaches the prescribed limit, it has an option of divesting its holding or reclassifying it as FDI while adhering to conditions laid down by RBI and Sebi within five trading days from the date of settlement of the trades or else it will be considered as a breach.

As per the framework, the concerned FPI will need approvals from the government and accord of the Indian investee firm involved. However, this facility will not be available for any sector banned for FDI, RBI said.

As per Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, to enable reclassification, FPI should report their investment portfolio within the stipulated time frame.

Following this, the FPI should approach its custodian for transferring the equity instruments of the Indian company using demat account holding its foreign portfolio investment to its demat account maintained for holding FDI, the RBI said.

If an FPI fails to divest its holding within the prescribed threshold i.e. five trading days, the entire investment in the company by such foreign portfolio investors shall be considered as investment under the FDI, according to regulations.