RBI came out with new guidlines for recategorizing FPI to FDI

On Monday, the Reserve Bank of India (RBI) implemented a new operational framework that allows foreign portfolio investment (FPI) to be reclassified as foreign direct investment (FDI) if the holdings exceed the specified threshold.

Currently, regulations stipulate that the combined investments made by an FPI and its investor group must not exceed 10% of an Indian company’s total paid-up equity on a fully diluted basis.

The limit should be breached, the concerned FPI may either divest holdings or reclassify them as FDI, provided conditions set by the RBI and Securities and Exchange Board of India (SEBI) are met.

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The divestment or reclassification must occur within five trading days from the settlement date of the trades that caused the breach.

Under the new framework, the reclassification process requires government approval and the consent of the Indian investee company involved. The RBI clarified, however, that reclassification is not allowed in sectors where FDI is restricted. The entire investment must be reported as per the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

Following this, the FPI should instruct its custodian to transfer the equity instruments from the demat account designated for portfolio investments to the FDI account. The framework takes effect immediately, the RBI added.
 

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