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Informist, Monday, Nov. 11, 2024

 

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--RBI finalises framework to reclassify FPI invest into FDI if cap exceeded
--RBI: FPI invest reclassification not allowed for sectors where FDI barred
--RBI: FPIs must state intention to reclassify existing invest into FDI

 

NEW DELHI – The Reserve Bank of India Monday notified an operational framework for reclassifying foreign portfolio investments to foreign direct investments in case of breach of the investment limit by foreign portfolio investors. The regulator said such reclassifications cannot happen for sectors that bar FDI and the foreign investors must clearly state their intent for the reclassification.

 

The RBI said Schedule II of its Foreign Exchange Management (Non-debt Instruments) Rules, 2019, prescribes that investments made by foreign portfolio investors should be less than 10% of the total paid-up equity capital on a fully diluted basis. FPIs breaching this limit have the option to divest holdings or reclassify such holdings as FDI within five days.

 

The operational guidelines, which came into effect immediately, barred any reclassification in sectors where FDI is prohibited, which include lottery, cigar and cigarette manufacturing, and atomic energy. The original norms allow FPIs to hold 24% of the total paid-up equity capital of an Indian company in a sector where FDI is prohibited.  

 

The FPI should clearly state its intent for the reclassification to foreign direct investment, the RBI's new guidelines said. The custodian must suspend any request to invest more than the limit until all approvals and documentation are furnished by the FPI. These include government approvals, such as adhering to sectoral caps and other investment limits, and the investee company's concurrence to becoming the target of FDI.

 

"Provided that where the necessary prior approvals/concurrence have not been obtained by the FPI, the investment beyond the prescribed limit shall be compulsorily divested within the prescribed time," the notification said. 

 

The entire investment shall be reported as FDI by the Indian company if the breach has been caused by fresh issuance of equity instruments. The foreign investor will have to report the investment if it occurs due to share purchases in the secondary market, while the authorised dealer bank must report it as divestment in the LEC (FII) form, the RBI said.

 

With the reporting complete, the FPI's investment should be transferred from the custodian's demat account for portfolio investment to direct investment. The custodian should then unfreeze the FPI's request for the additional purchases and process it, the regulator said. 

 

"The date of investment causing breach in such cases shall be considered as the date of reclassification," the operational guidelines said. "Thereafter, the entire investment of the FPI in the Indian company shall be considered as FDI and shall continue to be treated as FDI even if the investment falls to a level below 10% subsequently."  End

 

Reported by Aaryan Khanna

Edited by Saji George Titus

 

 

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