Introduction of framework for reclassification of Foreign Portfolio Investment (FPI) to Foreign Direct Investment (FDI)

RBI has issued the framework enabling reclassification of FPI holdings into FDI. The framework essentially provides an option to the investor to either divest the holdings or reclassify the same as FDI, subject to prescribed conditions. This option is exercisable within five trading days from the settlement date resulting in breach of the prescribed limit of FPI investment i.e. 10% of total paid-up equity capital of the Indian company. 

The key aspects of the new framework are:

• FPIs opting for reclassification are required to obtain requisite approvals from the government and the Indian company, wherever applicable. Such reclassification, however, shall not be permitted in sectors where FDI is prohibited.
• Reporting of the entire investment shall be undertaken by the Indian company and FPIs respectively, as applicable, within the prescribed timelines i.e. necessitating the submission of specific forms.
• Following compliance with mandated reporting requirements, FPIs should coordinate with their custodians to transfer the equity instruments from their demat accounts designated for FPI to those designated for FDI. 
• It is pertinent to mention that the investment shall be regarded as FDI upon completion of reclassification procedures, regardless of any subsequent reduction below the ten percent threshold.

Source: A.P. (DIR Series) Circular No. 19 dated 11 November 2024