What changed
RBI has formalized the process for FPIs to reclassify equity holdings that breach the 10% paid-up capital limit into FDI, replacing the earlier ad-hoc approach. The framework mandates prior government approvals, investee company concurrence, and custodian action within five trading days of settlement of the breach-causing trades. If prior approvals are not obtained, compulsory divestment is required within the same timeline.
What it means for you
Banks must now guide FPIs through a structured reclassification route, ensuring adherence to FDI entry routes, sectoral caps, and pricing guidelines. This reduces ambiguity for FPIs and investee companies, but increases compliance burden on AD banks to verify approvals and freeze transactions. Non-compliance risks forced divestment, impacting foreign investment flows.
What you must do
- Update internal SOPs to handle FPI reclassification requests under the new framework.
- Train staff on verifying government approvals, investee company concurrence, and sectoral caps.
- Ensure custodian systems can freeze purchase transactions for FPIs seeking reclassification upon receipt of intent and approvals.
- Advise FPI clients to obtain all prior approvals before acquiring equity instruments beyond the limit.
- Monitor FPI holdings against the 10% limit and flag breaches promptly.
Who it affects
Category-I Authorised Dealer Banks, Foreign Portfolio Investors (FPIs), Indian investee companies with FPI holdings, Custodian banks handling FPI accounts
What happens if an FPI breaches the 10% limit but fails to get prior approvals?
The investment beyond the limit must be compulsorily divested within five trading days from settlement of the breach-causing trades.
Can reclassification happen in any sector?
No, reclassification is not permitted in sectors where FDI is prohibited. The investee company must also confirm compliance with sectoral caps and government approvals.
What is the role of the custodian in this process?
The custodian must freeze all purchase transactions by the FPI in the investee company's equity instruments until the reclassification is completed, upon receiving the FPI's intent and approvals.