The Reserve Bank of India (RBI) has introduced an operational framework for foreign portfolio investors (FPIs) regarding their investments in Indian companies.
According to this framework, if the investment by an FPI or its group exceeds the allowed limit, it will be reclassified as foreign direct investment (FDI).
Currently, FPIs and their investor groups must keep their investment below 10 percent of a company’s total paid-up equity capital, which includes all types of shares held.
Options for FPIs Exceeding Investment Limits
If an FPI accidentally exceeds this limit, it has two choices: sell the extra stake or reclassify it as FDI.
To do so, the FPI must follow guidelines set by both the RBI and the Securities and Exchange Board of India (SEBI)
and make necessary adjustments within five business days of the transaction that exceeded the limit.
Reclassification Process and Immediate Effect
As part of the reclassification process, the FPI must get approval from the government and consent from the Indian company they invested in.
The entire reclassified investment must be disclosed as per the Foreign Exchange Management Regulations of 2019.
After this, the FPI should inform its custodian to transfer the shares from its FPI demat account to a separate demat account designated for FDI.
The RBI has stated that these new guidelines are effective immediately.
