On Monday, the Reserve Bank of India issued a framework for reclassifying foreign portfolio investor (FPI) investments to foreign direct investment (FDI) if the entity exceeds the prescribed limit of 10% ownership in paid-up equity capital.

If an FPI breaches the prescribed 10% limit, it can divest its holdings or reclassify them as FDI, subject to RBI and SEBI conditions. This must be done within five trading days from the settlement date of the trades causing the breach.

The RBI has issued an operational framework to guide the reclassification of foreign portfolio investments (FPI) to foreign direct investments (FDI).

As per the framework, the FPI must obtain necessary government approvals and the consent of the Indian investee company for reclassification.

According to the RBI, reclassification is not allowed in sectors where FDI is prohibited.

For reclassification, the entire investment held by the FPI must be reported within the timelines specified under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

After reporting, the FPI must request its Custodian to transfer the equity instruments from its demat account for FPIs to its demat account for FDI. These directions are effective immediately, according to the RBI.

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