The reclassification of excess FPI stake as FDI: What does this mean for foreign investors?

Under Foreign Exchange Management (Non-debt Instruments) Rules, 2019, investment made by the FPI should be less than 10 per cent of the total paid-up equity capital on a fully diluted basis. Now, any FPI investing in breach of the prescribed limit would have the option of divesting their holdings or reclassifying such holdings as FDI within five trading days from the date of settlement of the trades causing the breach, the RBI notification said.

Approvals needed

The FPI concerned should obtain the necessary approvals from the government, including approvals required in case of investment from land bordering countries and ensure that the acquisition beyond prescribed limit is made in accordance with the provisions applicable for FDI, the RBI said in the notification. This means that investment should be in adherence to entry route, sectoral caps, investment limits, pricing guidelines, and other attendant conditions for FDI under the rules.

According to the RBI, the FPI should have concurrence of the Indian investee company concerned for reclassification of the investment to FDI to enable such company to ensure compliance with conditions pertaining to sectors prohibited for FDI, sectoral caps and government approvals, wherever applicable, under the rules.

Impact on FPI flows, companies

The new framework will allow the FPI to invest in companies beyond the 10 per cent limit. This means if the FPI acquires 22 per cent stake in a company, it can classify 12 per cent as FDI. The only condition is that it should have the approvals from the government and the investee company. The directive will also benefit Indian companies as it becomes easier to attract more foreign investment. However, the rule won’t be applicable in the case sectors with sectoral caps.

FPIs have pulled out over Rs 1.36 lakh crore from the cash market since October 1 this year.

FDI and FPI

FDI involves a foreign investor acquiring stake in a company or project promoted by an investor, institution or the government in India. It’s usually a long-term investment and done directly with proper government approvals without routing it through stock markets.

Foreign portfolio investment refers to investments flows into a country’s financial assets such as bonds and stocks. FPI, which is usually short-term, is done through the stock markets or IPOs and it can be bought and sold at any time for profits.