Operational framework for reclassification of Foreign Portfolio Investment to Foreign - 11th November 2024 - Reserve Bank of India - Gazette Notification PDF
Issued by Reserve Bank of India
Read or download the official PDF of this gazette notification issued by the Reserve Bank of India on 11th November 2024.
Executive Summary & Key Takeaways
Executive Summary: This circular from the Reserve Bank of India, dated November 11, 2024, outlines the operational framework for reclassification of Foreign Portfolio Investment (FPI) to Foreign Direct Investment (FDI) when FPI investment exceeds 10% of a company's total paid-up equity capital. It details the necessary approvals, reporting procedures, and conditions for such reclassification, effective immediately. FPIs exceeding the limit must either divest or reclassify within five trading days from the date of settlement of the trades causing the breach.
Key Points / Main Content:
Framework Purpose: Provides guidelines for reclassifying FPI to FDI when the 10% investment limit (as per Schedule II of FEM NDI Rules, 2019) is breached.
Conditions for Reclassification:
- Reclassification isn't allowed in sectors prohibited for FDI.
- Approvals are needed from the Government, as applicable, and concurrence from the Indian investee company.
Approval and Concurrence:
- The FPI needs government approvals, as applicable, ensuring compliance with FDI provisions (entry route, sectoral caps, investment limits, pricing guidelines, etc.).
- The Indian investee company's concurrence is required to ensure compliance with sectors prohibited for FDI, sectoral caps, and government approvals.
Process and Reporting:
- FPI must inform its Custodian of its intent to reclassify, providing copies of approvals and concurrence, which then freezes purchase transactions.
- If approvals/concurrence aren't obtained, investment exceeding the limit must be divested within the prescribed time.
- Reporting must be done as per Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
- Indian company reports in form FCGPR (fresh issuance of equity).
- FPI reports in form FCTRS (secondary market acquisition).
- AD bank reports reclassification as divestment under LEC (FII reporting).
Post-Reporting Actions:
- FPI requests Custodian to transfer shares from FPI to FDI demat account after reporting is complete.
- The date of the investment causing the breach is considered the reclassification date.
- After reclassification, the entire investment is treated as FDI, even if it later falls below 10%.
- The Foreign Portfolio investor along with its investor group shall be treated as a single person for the purpose of reclassification of foreign portfolio investment.
Timelines and Governance:
- Reclassification or divestment must be completed within the prescribed time (five trading days from the date of settlement of the trades causing the breach).
- Post-reclassification, the investment is governed by Schedule I to the Rules.
Impact Analysis
Category I Authorised Dealer (AD) Banks:
- Impact: Must facilitate and report transactions related to the reclassification of FPI to FDI. Must also bring the contents of this circular to the notice of their customers constituents concerned.
- Action Required: Understand the operational framework, assist FPIs with reporting requirements (FCGPR, FCTRS, LEC FII), and ensure compliance with the guidelines.
Foreign Portfolio Investors (FPIs):
- Impact: This framework directly affects FPIs that have exceeded or are about to exceed the 10% investment limit. They now have a structured process for reclassifying their investment as FDI.
- Action Required: Obtain necessary government approvals and concurrence from the investee company, inform Custodian, adhere to reporting requirements, and transfer shares to the appropriate demat account.
Indian Investee Companies:
- Impact: Companies receiving FPI exceeding the limit must provide concurrence for the reclassification and comply with FDI regulations.
- Action Required: Provide concurrence, comply with applicable FDI regulations, and report in form FCGPR when applicable (fresh issuance of equity).
Custodian:
- Impact: Custodians play a crucial role in freezing and transferring equity instruments during the reclassification process.
- Action Required: Freeze purchase transactions upon notification, verify reporting completion, and process the transfer of shares between demat accounts.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the Indian financial system.
Foreign Exchange Management Act, 1999: An Act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Foreign Exchange Management Non-debt Instruments Rules, 2019: Rules notified by the Central Government pertaining to foreign exchange management related to non-debt instruments.
Foreign Portfolio Investment: Investment in financial assets such as stocks or bonds made by investors from other countries.
Foreign Direct Investment: An investment made by a firm or individual in one country into business interests located in another country.
SEBI: Securities and Exchange Board of India, the regulator of the securities market in India.
AD Category I banks: Authorised Dealer Category I banks, which are authorized by the Reserve Bank of India to deal in foreign exchange.
Form FCGPR: Form for reporting issue of capital to person resident outside India
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भारतीय �रज़वर् बैंक
RESERVE BANK OF INDIA
www.rbi.org.in
RBI/2024-25/90 November 11, 2024
A.P. (DIR Series) Circular No. 19
To
All Category – I Authorised Dealer Banks
Madam / Sir
Operational framework for reclassification of Foreign Portfolio Investment to
Foreign Direct Investment (FDI)
Attention of Authorised Dealer (AD) Category - I banks is invited to the Foreign Exchange
Management (Non-debt Instruments) Rules, 2019, (hereinafter referred to as ‘Rules’) notified
by the Central Government on October 17, 2019.
2. We draw your attention to Schedule II to the Rules which prescribes that investment made
by foreign portfolio investor along with its investor group (hereinafter referred to as ‘FPI’) shall
be less than 10 percent of the total paid-up equity capital on a fully diluted basis. Further, FPI
investing in breach of the prescribed limit shall have the option of divesting their holdings or
reclassifying such holdings as FDI. In this regard, an operational framework for such
reclassification of foreign portfolio investment by FPI to FDI is provided in the Annex. The AD
Category-I banks may accordingly facilitate the reporting of such transactions as per this
framework.
3. These directions will become operative with immediate effect. AD Category-I banks may
bring the contents of this circular to the notice of their customers / constituents concerned.
4. The directions contained in this circular have been issued under sections 10(4)
and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without
prejudice to permissions / approvals, if any, required under any other law.
Yours faithfully
(Dr. Aditya Gaiha)
Chief General Manager-In-ChargeAnnex
Operational framework for reclassification of Foreign Portfolio Investment by FPI to
FDI
Reference may be drawn to Schedule II of FEM (NDI) Rules, 2019 (hereinafter referred as
“Rules”) which prescribes that investment made by the FPI shall be less than 10 percent of
the total paid-up equity capital on a fully diluted basis (hereinafter referred as “prescribed
limit”). In terms of Para 1(a)(iii) of Schedule II of the Rules, any FPI investing in breach of the
prescribed limit shall have the option of divesting their holdings or reclassifying such holdings
as FDI subject to the conditions specified by the RBI and SEBI within five trading days from
the date of settlement of the trades causing the breach (hereinafter referred as “prescribed
time”). In case the FPI intends to reclassify its foreign portfolio investment into FDI, the FPI
shall follow the operational framework as given below:
1) The facility of reclassification shall not be permitted in any sector prohibited for FDI.
2) The FPI concerned shall obtain the following approvals/concurrence before intending to
acquire equity instruments beyond the prescribed limit:
i) Necessary approvals from the Government, as applicable, including approvals
required in case of investment from land bordering countries and ensure that the
acquisition beyond prescribed limit is made in accordance with the provisions
applicable for FDI, which means that investment should be in adherence to entry
route, sectoral caps, investment limits, pricing guidelines, and other attendant
conditions for FDI under Schedule I to the Rules.
ii) Concurrence of the Indian investee company concerned for reclassification of the
investment to FDI to enable such company to ensure compliance with conditions
pertaining to sectors prohibited for FDI, sectoral caps and government approvals,
wherever applicable, under the Rules.
3) The FPI shall clearly articulate its intent to reclassify existing foreign portfolio investment held
in a company into FDI and shall provide the copy of the necessary approvals and concurrence to
its Custodian pursuant to which the Custodian shall freeze the purchase transactions by
such FPI in equity instruments of such Indian company, till completion of the
reclassification:
Provided that where the necessary prior approvals/concurrence have not been
obtained by the FPI, the investment beyond the prescribed limit shall be compulsorily
divested within the prescribed time.भारतीय �रज़वर् बैंक
RESERVE BANK OF INDIA
www.rbi.org.in
4) For reclassification, the entire investment held by such FPI shall be reported within the
timelines as specified under Foreign Exchange Management (Mode of Payment and
Reporting of Non-Debt Instruments) Regulations, 2019, in the following manner:
i) By the Indian company in form FC-GPR where the investment beyond the
prescribed limit is resulting from fresh issuance of equity instruments by an Indian
company to such FPI.
ii) By the FPI in form FC-TRS, where the investment beyond the prescribed limit is
due to acquisition of equity instruments by such FPI in the secondary market.
iii) AD bank concerned shall report the amount of reclassified foreign portfolio
investment as divestment under the LEC (FII) reporting.
5) Post completion of reporting as above, the FPI shall approach its Custodian with a request
for transferring the equity instruments of the Indian company from its demat account
maintained for holding foreign portfolio investments to its demat account maintained for
holding FDI. After ensuring that the reporting for reclassification is complete in all aspects,
the custodian shall unfreeze the equity instruments and process the request. The date of
investment causing breach in such cases shall be considered as the date of
reclassification. Thereafter, the entire investment of the FPI in the Indian company shall
be considered as FDI and shall continue to be treated as FDI even if the investment falls
to a level below ten percent subsequently. The Foreign Portfolio investor along with its
investor group shall be treated as a single person for the purpose of reclassification of
foreign portfolio investment.
6) In terms of the provisions contained in Schedule II to the Rules, the reclassification or
divestment of the holdings, as the case may be, shall be completed within the prescribed
time.
7) Post reclassification of foreign portfolio investment to FDI, the said investment shall be
governed by Schedule I to the Rules.
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