The Reserve Bank of India (RBI) has introduced an operational framework for the reclassification of investments made by Foreign Portfolio Investors (FPIs) to Foreign Direct Investment (FDI). This move is designed to address cases where an FPI, along with its investor group invests more than the pre-determined limit.
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Current FPI Investment Limit and Breach Consequences
Currently, FPIs are allowed to hold less than 10% of the total paid-up equity capital of an Indian company on a fully diluted basis. If this limit is breached, the FPI has the option to either divest its excess holdings or reclassify them as FDI. This reclassification must be done within five trading days from the date of settlement of the trades that caused the breach, subject to conditions set by the RBI and the Securities and Exchange Board of India (SEBI).
According to the framework, FPIs opting for reclassification will need to secure necessary approvals from the Indian government and the investee company. Additionally, reclassification will not be permitted in sectors where FDI is prohibited.
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The RBI has specified that the entire investment must be reported as per the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Once reporting is complete, the FPI must approach its custodian to transfer the equity instruments from its demat account for foreign portfolio investments to a demat account designated for holding FDI.
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