The Reserve Bank of India (RBI) has allowed foreign portfolio investors (FPIs) to reclassify as foreign direct investment (FDI) the portion of their investments that exceed the prescribed limit in a company, subject to certain conditions.
This is aimed at further increasing the ease of doing business in India and attracting foreign investment.
What this means is that FPIs investing in a company that exceeds the prescribed limit of 10 percent of the total paid up share capital on a fully diluted basis will not have to divest their shares, going by RBI’s operational framework for the reclassification of foreign portfolios. investments in direct foreign investments.
RBI said that any FPI investing in violation of the prescribed limit will have the option to divest their holdings or reclassify such holdings as FDI, subject to the conditions specified by the RBI and SEBI within five trading days from the date of settlement of the transactions that caused the transaction. infringement.
The reclassification facility should not be allowed in sectors prohibited for foreign direct investment.
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Regulatory Approvals
FPIs intending to acquire equity instruments in excess of the prescribed limit must obtain government approvals, including approvals required in case of investments from neighboring countries, and ensure that the acquisition above the prescribed limit is made in accordance with the provisions applicable to FDI.
Such investments must be in accordance with the entry route, sectoral ceilings, investment limits, price guidelines and other related conditions for foreign direct investment.
Further, FPIs must obtain permission from the concerned Indian investee company to reclassify the investment as FDI. This is to enable the company to ensure compliance with the conditions relating to sectors prohibited by the rules for foreign direct investment, sectoral ceilings and government approvals, where applicable.
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Jyoti Prakash Gadia, Managing Director, Resurgent India, said the RBI’s announced operational framework provides guidance for FPIs that choose to reclassify investments beyond the prescribed limit from FPI to FDI. This ensures good compliance, while maintaining the integrity of the FDI system and its rules.
Kumudini Bhalerao, Partner, MMJC and Associates, noted that the framework reinforces the need for obtaining appropriate regulatory approvals prior to any reclassification.
As per the guidelines, after completion of statutory reporting, the FPI should approach its custodian with a request to transfer the equity instruments of the Indian company from the demat account maintained for holding foreign portfolio investments to the demat account held is used for holding direct foreign investments.
After ensuring that the reclassification reporting is complete in all aspects, the depositary will unfreeze the equity instruments and process the request.
The date on which the investment causes infringement in such cases is considered the date of reclassification. Thereafter, the entire investment of the FPI in the Indian company will be treated as FDI and will continue to be treated as FDI even if the investment falls below 10 percent thereafter.
The foreign portfolio investor, together with his investor group, will be treated as a single person for the purpose of reclassification of foreign portfolio investments.
