The Reserve Bank of India (RBI) announced on Monday that foreign portfolio investors (FPIs) who exceed the 10% investment cap in listed Indian companies can now either reduce their holdings or reclassify the excess portion as foreign direct investment (FDI). Under existing regulations, an FPI and its investor group may invest up to 10% of a company’s paid-up equity capital on a fully diluted basis.
Operational Framework for Reclassification Rolled Out
To facilitate this transition, the RBI has introduced an operational framework, effective immediately, for reclassifying foreign portfolio investments to FDI. The framework mandates that FPIs seeking reclassification must obtain approval from the Indian government and the investee company.
Restrictions and Compliance Requirements
The facility for reclassification, however, will not be available in sectors where FDI is prohibited. FPIs wishing to reclassify must provide a clear declaration of their intent and submit relevant approvals. Notably, once reclassified as FDI, the investment will continue to be treated as FDI even if it subsequently falls below the 10% threshold.
The new regulation aims to provide flexibility for FPIs with substantial holdings, allowing them to align more closely with the FDI framework while ensuring compliance with sectoral caps and regulatory requirements.