RBI Unveils New Framework for FPI to FDI Reclassification

The Reserve Bank of India has introduced an operational framework allowing foreign portfolio investors to reclassify their investments as foreign direct investment if the prescribed limit is breached. This transition requires approvals and does not apply to prohibited sectors.

The Reserve Bank of India has set forth an operational framework enabling foreign portfolio investors to convert their investments to foreign direct investment should they surpass the prescribed limit. This move aims to streamline compliance amidst increasing FPI activities.

Previously, foreign portfolio investments, along with associated groups, were restricted to less than 10% of a company's total paid-up equity capital. Investors who breach this threshold now have the option to reclassify their investments as FDI, following conditions imposed by the RBI and SEBI, which must be fulfilled within five trading days post-settlement.

The framework mandates that FPIs secure necessary government approvals and the concurrence of the investee company. However, reclassification is not allowed in sectors where FDI is prohibited. The directive, effective immediately, forms part of regulations under the Foreign Exchange Management Act, requiring specific reporting and custodial processes.

(With inputs from agencies.)