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RBI provides operation framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment
The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (Rules) stipulate that the aggregate investment by a foreign portfolio investor, along with its investor group (collectively referred to as FPI), must remain below 10% of the total paid-up equity capital of an Indian company on a fully diluted basis ("prescribed limit"). In the event of a breach, the Rules mandate that the FPI must either divest its holdings to fall below the prescribed limit or reclassify its entire investment as Foreign Direct Investment (FDI) within five trading days from the date of settlement of the trades causing the breach. However, the absence of detailed procedural guidelines for such re-classification created ambiguity.
To address this, the Reserve Bank of India (RBI), through its circular dated 11 November 2024, has introduced an operational framework for the reclassification of FPI investments into FDI. Additionally, the Securities and Exchange Board of India (SEBI) has aligned its Master Circular for Foreign Portfolio Investors, Designated Depository Participants, and Eligible Foreign Investors with the provisions of the RBI circular.
| Key Highlights of the Operational Framework for Reclassification of FPI to FDI |
- Prohibited Sectors
- Reclassification is not permitted in sectors where FDI is prohibited under the Rules.
- 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.
- 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.
- Reporting Obligations
| Sr. No. |
Event triggering excess investments |
RBI reporting |
Entity responsible |
| 1 |
Fresh issuance of equity instruments |
Form FC-GPR within 30 days
|
Indian company |
| 2 |
Acquisition of equity instruments from the secondary market |
Form FC-TRS within 60 days
|
FPI |
- 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.
- 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.
- 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.
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