The Reserve Bank of India (RBI) has allowed foreign portfolio investors (FPIs) leeway to re-classify the portion of their investment which is beyond the prescribed limit in a company as foreign direct investment (FDI), subject to conditions.

This is aimed at further enhancing the ease of doing business in India and attracting foreign investments.

What this means is that FPIs having investment in a company that is beyond the prescribed limit of 10 per cent of its total paid-up equity capital on a fully diluted basis need not divest their holdings, going by RBI’s operational framework for reclassification of foreign portfolio investment into FDI.

RBI said any FPI investing in breach of the prescribed limit will have the option of divesting their holdings or reclassifying such holdings as FDI, subject to the conditions specified by the RBI and SEBI within five trading days from the date of settlement of the trades causing the breach.

The reclassification facility is not to be permitted in any sector prohibited for FDI.

Regulatory approvals

FPIs intending to acquire equity instruments beyond the prescribed limit have to obtain approvals from the government, including approvals required in case of investment from land bordering countries and ensure that the acquisition beyond prescribed limit is made in accordance with the provisions applicable for FDI.

Such investments have to be in adherence to entry route, sectoral caps, investment limits, pricing guidelines, and other attendant conditions for FDI.

Further, FPIs have to obtain concurrence of the Indian investee company concerned for reclassification of the investment to FDI. This is to enable the company to ensure compliance with conditions pertaining to sectors prohibited for FDI, sectoral caps and government approvals, wherever applicable, under the rules.

Jyoti Prakash Gadia, Managing Director of Resurgent India, said the RBI’s announced operational framework offers guidance for FPIs choosing to reclassify investments beyond the prescribed limit from FPI to FDI. This ensures proper compliance, while maintaining the integrity of the FDI scheme and its rules.

Kumudini Bhalerao, Partner, MMJC and Associates, observed that the framework reinforces the necessity for obtaining applicable regulatory approvals prior to any reclassification.

Per the guidelines, post completion of regulatory reporting, the FPI has to approach its Custodian with a request for transferring the equity instruments of the Indian company from its demat account maintained for holding foreign portfolio investments to its demat account maintained for holding FDI.

After ensuring that the reporting for reclassification is complete in all aspects, the custodian will unfreeze the equity instruments and process the request.

The date of investment causing breach in such cases will be considered as the date of reclassification. Thereafter, the entire investment of the FPI in the Indian company will be considered as FDI and will continue to be treated as FDI even if the investment falls to a level below 10 per cent subsequently.

The foreign portfolio investor along with its investor group will be treated as a single person for the purpose of reclassification of foreign portfolio investment.

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