FPI to FDI Reclassification: New RBI Framework

The Reserve Bank of India Vide its circular dated 11 November 2024, has finalised an operational framework for reclassification of Foreign Portfolio Investment made by Foreign Portfolio Investors (FPI) to Foreign Direct Investment (FDI) under Foreign Exchange Management (Non-debt Instruments) Rules, 2019 in case of any breach of the investment limit by the FPIs concerned. As per the RBI framework, foreign portfolio investors have the option of divesting their holdings or reclassifying such holdings as FDI if the 10 per cent cap is breached. This reclassification has to be completed "within five trading days from the date of settlement of the trades causing the breach.

This would give more elbow room to those FPIs who wish to raise their stakes in Indian Equities. It is understood that there are around 17 companies listed on the National Stock Exchange (NSE) where a single FPI has holdings of up to 9 per cent. Key Highlights of the Operational Framework for Reclassification of FPI to FDI

1. Reclassification is not permitted in sectors where FDI is prohibited under the Rules.

2. Mandatory Approvals

• FPIs are required to obtain the concurrence of the Indian investee company.
• Obtain requisite approvals from the Government of India, where applicable, including approvals for investments originating from countries sharing land borders with India.
• Investments exceeding prescribed limits must comply with FDI regulations.

3. Role of Custodian

• The FPI must notify its intent to reclassify to its custodian.
• Upon notification, the custodian shall freeze purchase transactions in the equity instruments of the Indian company until the reclassification process is concluded.
• Failure to secure necessary approvals or concurrence within prescribed timelines shall result in compulsory divestment of the excess investment.

4. Reporting Obligations

5. Completion of Reclassification

• Upon verification of compliance with reporting requirements, the custodian will lift the freeze on the equity instruments.
• The date of the investment breach shall be treated as the effective date of reclassification.

6. FDI Treatment Post-Reclassification

• Once reclassified, the entire investment by the FPI in the Indian company will be treated as FDI, regardless of whether the holding subsequently falls below the 10% threshold.

7. Investor Group Consideration

• The FPI, along with its investor group, shall be treated as a single entity for reclassification purposes.
• Such investments will be governed under Schedule I of the Rules, which deals with FDI.