RBI ISSUES FRAMEWORK FOR RECLASSIFICATION OF FPI TO FDI Reserve Bank of India (“RBI”), vide its notification dated November 11, 2024, has released guidelines for reclassifying foreign portfolio investments (“FPI”) into foreign direct investments (“FDI”) under certain conditions. According to Schedule II of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”), Foreign portfolio investors (along with its investor group) can hold less than 10% of a company’s paid-up equity capital on a fully diluted basis. Exceeding this limit allows foreign portfolio investors to either divest or reclassify their holdings as FDI within five trading days from the date of settlement of the trades causing the breach. In case the foreign portfolio investors intend to reclassify their FPI into FDI, the operational framework as stated below shall be followed: (a) Sector Prohibition: Reclassification is not allowed in sectors where FDI is prohibited. (b) Approvals Needed: Foreign portfolio investors must obtain government approval (especially for investments from bordering countries) and investee company concurrence before exceeding the FPI limit. (c) Intent & Custodian Role: Foreign portfolio investors must inform custodians of reclassification intent and provide a copy of necessary approvals and concurrence, following which custodians may freeze FPI purchase transactions until reclassification is completed. (d) Reporting Requirements: All FDI reclassifications must be reported as per RBI’s Mode of Payment and Reporting of Non-Debt Instruments Regulations, 2019. (e) Custodian Processing: Upon reporting completion, foreign portfolio investors shall approach its custodian to transfer the equity instruments of a company from its demat account maintained for holding FPI investments to its demat account maintained for holding FDI, marking the breach date as the reclassification date. After ensuring the that the reporting for reclassification is complete in all aspects, the custodian shall unfreeze the equity instruments and process the said request. Thereafter, such reclassified investment shall be considered as FDI and shall continue to be treated as FDI, even if the investment drops below 10% subsequently. The foreign portfolio investor along with its investor group shall be treated as a single person for the purpose of reclassification of FPI. (f) Time Compliance: Reclassification must occur within the five trading days period, after which the investment shall be governed by Schedule Ito the NDI Rules. Notification link: https://lnkd.in/g5zCDpNf #VaishAssociates #LegalUpdate #RegulatoryUpdate #FDI #FPI #NDIRules #RBI
