RBI, Sebi unveil rules for converting excess investment by FPIs into FDI

Financial regulators, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), issued new guidelines on Monday directing foreign portfolio investors (FPIs) to secure government approval and concurrence from investee firms if they acquire equity stakes that exceed prescribed limits.

- KHUSHBOO TIWARI

The regulators introduced an operational framework for reclassification of FPI investments to foreign direct investments (FDI) should holdings surpass the stipulated thresholds. This framework outlines steps to follow if such a breach occurs.

Under the Foreign Exchange Management Act (Fema), FPIs are allowed to hold up to 10 per cent of a company's total paid-up equity capital. Any FPI breaching this limit now has the option to divest holdings or reclassify such holdings as FDI, subject to conditions.

The new rules provide a window of five days from the settlement of trades to do the same. Once reclassified, the entire investment of an FPI will be deemed FDI and remain so, even if holdings fall below 10 per cent at a later date.

Experts said the notification clarifies that government approval is a must before making any additional investment beyond the prescribed limit.