RBI, Sebi issue framework for FPI to FDI investment reclassification
Mumbai, Nov 11, 2024
FPIs will need to seek government approval before reclassification in applicable cases
Financial regulators Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) on Monday directed foreign portfolio investors (FPIs) to obtain necessary approvals from the government and concurrence from the investee companies in cases of acquisition of equity holdings beyond the prescribed limits.
The regulators issued an operational framework on Monday for the reclassification of overseas investments by FPIs to foreign direct investments (FDI), outlining the process to be followed in case of breach of the thresholds.
The Foreign Exchange Management Act (FEMA) norms prescribe 10 per cent as the threshold for investments made by FPIs in the total paid-up equity capital. Any FPI breaching this limit has the option to divest its holdings or reclassify such holdings as FDI, subject to several conditions. The rules provide a window of five days from the settlement of trades to do the same.
Experts said that the notification clarifies that government approval must be obtained first before making the additional investment. Further, the FPIs need to explain the intention to reclassify the investment as FDI.
“The operational framework will now enable increased investment by FPIs in Indian companies beyond the 10 per cent limit. Importantly, while no corresponding clarifications have been issued by the Central Board of Direct Taxes (CBDT), one could argue that the investment should be considered as FDI even for tax purposes, which means that tax deducted at source (TDS) would be applicable on the sale of investments after reclassification,” said Rajesh Gandhi, partner, Deloitte.
Notably, the facility for reclassification from FPI to FDI is not permitted in certain prohibited sectors.
“Necessary approvals from the government, as applicable, including approvals required in the case of investment from land-bordering countries, must ensure that the acquisition beyond the prescribed limit is made in accordance with the provisions applicable for FDI. This means that the investment should adhere to the entry route, sectoral caps, investment limits, pricing guidelines, and other attendant conditions for FDI under Schedule I to the Rules,” said the circular.
Following reclassification, the entire investment of the FPI in the company will be considered FDI and will continue to be classified as such even if it falls below 10 per cent.
RBI and Sebi have separately shared the process to be followed for reporting such breaches and reclassification by the FPIs and custodians.
“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 the investment causing the breach in such cases shall be considered the date of reclassification,” as per the circular.
[The Business Standard]
