RBI introduces new Circular for Reclassification of Foreign Portfolio Investment to Foreign Direct Investment
In a significant development, the Reserve Bank of India (RBI) has issued an operational framework for the reclassification of Foreign Portfolio Investment (FPI) to Foreign Direct Investment (FDI). This new framework, outlined in A.P. (DIR Series) Circular No. 19, is set to help FPIs comply with the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (FEM Rules), which regulate foreign investment in India.
The revised rules clarify that any foreign portfolio investment exceeding 10% of a company’s paid-up equity capital will need to be reclassified as FDI or divested, in accordance with the regulations under Schedule II of the FEM Rules. FPIs are given a five-trading-day window to either divest their holdings or reclassify them as FDI following any breach of the 10% limit.
Key Highlights of the Operational Framework:
- Sector Restrictions: Reclassification is not allowed in sectors that are prohibited for FDI.
- Approval Requirements: Before exceeding the prescribed 10% limit, the FPI must obtain necessary approvals, including those for investments from countries bordering India, and ensure compliance with FDI regulations such as entry routes, sectoral caps, and pricing guidelines. Additionally, the Indian company in which the FPI has invested must grant concurrence for the reclassification.
- Reclassification Process: The FPI must clearly communicate its intention to reclassify its holdings and submit all required documentation to its custodian. The custodian will then freeze the transactions in the equity instruments until reclassification is complete.
- Reporting of Investment: The reclassification must be reported by the Indian company or the FPI, depending on whether the investment came from a fresh issue of equity instruments or the secondary market. These reports must be submitted using the prescribed forms—FC-GPR for fresh issuance and FC-TRS for secondary market transactions.
- Demat Account Transfer: Once the reporting is complete, the FPI will request its custodian to transfer the equity instruments to its demat account for holding FDI. The reclassification date will be considered as the date of investment causing the breach, and the FPI’s investment will be treated as FDI thereafter.
- Timeline for Completion: The entire reclassification or divestment process must be completed within the prescribed timeframe to comply with the FEM Rules.
This framework aims to streamline the process for FPIs wishing to convert their portfolio investments into FDI while ensuring regulatory compliance and protecting the integrity of foreign investments in India.
