RBI's New Rules Reshape Foreign Investments: FPI to FDI

The Reserve Bank of India has issued an operational framework to classify foreign portfolio investments as foreign direct investments if a breach of investment limits occurs. This framework, with immediate effect, requires FPIs to obtain necessary approvals for reclassification, adhering to specific reporting regulations.

The Reserve Bank of India (RBI) has introduced new guidelines aimed at reshaping foreign investments. These rules allow for the reclassification of foreign portfolio investments (FPI) to foreign direct investments (FDI) if the prescribed investment limits are breached. This move is designed to ensure compliance and streamline investment flows into the Indian market.

The Securities and Exchange Board of India (SEBI) has also issued a circular detailing the procedures for this reclassification. According to the current regulations, FPIs and their investor groups must keep their holdings below 10 percent of the total paid-up capital on a fully diluted basis. Breaching this threshold means investors have two choices: divest their holdings or reclassify them as FDI within five trading days, with adherence to RBI and SEBI conditions.

Upon making such a reclassification, FPIs must obtain approvals from relevant government bodies and the Indian investee company. The RBI stipulates that reclassification isn't allowed in sectors prohibited for FDI. Once requirements are satisfied, FPIs are to report their investments under the Foreign Exchange Management Regulations and proceed with transferring equity instruments to the appropriate demat account.

(With inputs from agencies.)