FPI To FDI Reclassification: SEBI, RBI Lay Down SOP
2024-11-22
Authors: Hrishikesh Anand & Payaswini Upadhyay
What?
SEBI, RBI clarify the process for reclassifying FPI investments as FDI
Existing framework lacked detailed guidelines on such reclassification
As per law, an investor cannot be an FPI and FDI in the same entity. FPI investments are limited to less than 10% of a company’s equity
This doesn’t prevent an FPI from exceeding the threshold, but requires either divestment or reclassification after the purchase
How?
New framework: ‘Before intending to acquire’ shares in excess, FPI needs to get government approvals (e.g. for entry routes and sectoral limits) + go ahead from target company
After executing the trade, FPI must inform intent to reclassify to its custodian, along with above approvals. Custodian will then freeze additional purchases by the FPI in the same company
The investor or investee (as applicable) shall complete FEMA reporting. FPI will then place a request with custodian to transfer the investments to its FDI demat account
After verification, the custodian will complete the transfer, and the investment will be regulated as FDI
Bottom Line
The new framework provides a clearer, more structured process for reclassifying investments. This is relevant for FPIs looking to increase their shareholding in an entity to take a strategic, long-term outlook
Defining the moment of ‘intention to acquire’ might pose practical challenges. A simpler approach could be to use acquisition as the reference point for needing prior approvals