RBI issues new framework for reclassification of FPI to FDI
“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.
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In case the FPI intends to reclassify its foreign portfolio investment into FDI, the facility of reclassification will not be permitted in any sector prohibited for FDI.The Reserve Bank of India (RBI) on Monday directed foreign portfolio investors (FPIs) to obtain necessary approvals from the government and concurrence from the investee companies when their equity holdings go beyond the prescribed limits and they reclassify the holdings as foreign direct investment (FDI).
FEM (NDI) Rules, 2019 prescribe that investment made by the FPI should be less than 10 per cent of the total paid-up equity capital on a fully diluted basis.
Any FPI investing in breach of the prescribed limit should 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.
“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.
In case the FPI intends to reclassify its foreign portfolio investment into FDI, the facility of reclassification will not be permitted in any sector prohibited for FDI.
The FPI should clearly articulate its intent to reclassify existing foreign portfolio investment held in a company into FDI and should provide the copy of the necessary approvals and concurrence to its Custodian. The Custodian should then freeze the purchase transactions by such FPI in equity instruments of such Indian company, till completion of the reclassification.
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