The Reserve Bank of India (RBI), through its circular dated November 11, 2024, has issued an operational framework for the reclassification of investments made by Foreign Portfolio Investors (FPIs) as Foreign Direct Investment (FDI).
As per Schedule II of the Non-Debt Instruments (NDI) Rules, the aggregate investment by an FPI and its investor group in an Indian listed company must not exceed 10% of the total paid-up equity capital on a fully diluted basis. Investments exceeding this threshold must either be divested or reclassified as FDI by adhering to the framework outlined by the RBI.
Key Highlights of the Framework:
- Consent from the Investee Company:
- FPIs seeking reclassification must obtain consent from the Indian investee company to ensure compliance with the NDI Rules.
- Prior approvals from the Government of India (GoI) must be secured for investments in sectors requiring such approval or for acquisitions involving investors from land-bordering countries.
- No reclassification is allowed in sectors where FDI is prohibited.
- Investor Group Classification:
- FPIs and their investor groups are treated as a single entity for the purpose of reclassification.
- Declaration and Freezing of Further Purchases:
- FPIs intending to reclassify their investments as FDI must declare their intent and submit the requisite approvals to their custodian.
- The custodian will freeze further purchases by such FPIs until the reclassification process is completed.
- In the absence of prior approvals, any excess investment must be divested within the prescribed timeline.
- Reporting Requirements:
- The Indian company must report new equity issuances in Form FC-GPR, while FPIs must report secondary market acquisitions in Form FC-TRS.
- The concerned Authorised Dealer (AD) Category-I bank will report the reclassified foreign portfolio investment as divestment under the LEC (FII) reporting framework to the RBI.
- Reclassification Date:
- The date on which the investment limit breach occurred will be treated as the reclassification date.
- Transfer of Equity Instruments:
- Upon completion of the reporting requirements, the FPI must approach its custodian to transfer equity instruments from its demat account for foreign portfolio investments to its demat account for FDI holdings.
- Post-Reclassification Governance:
- Once reclassified, the investment will be governed by Schedule I of the NDI Rules applicable to FDI.
- The investment will continue to be treated as FDI even if it subsequently falls below the 10% threshold.
This framework aims to streamline compliance while ensuring adherence to regulatory requirements for FPIs exceeding prescribed investment thresholds.
