MUMBAI: The Reserve Bank of India (RBI) recently introduced a framework to facilitate the reclassification of foreign portfolio investments (FPI) as foreign direct investments (FDI) when FPI holdings exceed the 10 per cent cap on a company’s paid-up equity capital.
The 10 per cent cap has been set out in the Foreign Exchange Management Rules, 2019.
FPIs exceeding this threshold have the option to either reduce their holdings or reclassify the excess as FDI, with the process needing to be completed within five trading days of the trade settlement that led to the breach.
Govt approval needed
This reclassification will require necessary government approvals, especially for investments from countries bordering India, and must comply with FDI rules on entry routes, sectoral caps, and pricing guidelines.
The investee company’s consent is also required for reclassification. However, sectors where FDI is prohibited cannot utilise this reclassification option.
The release of this framework comes amid substantial FPI outflows. FPIs were net sellers of Indian equities for 30 consecutive trading sessions, with equity sales reaching Rs19,637.6 crore in the five days leading up to November 8.
Selling spree
This selling spree has had a notable impact, with assets under management (AUM) for foreign investors falling by over $85 billion in October – from $930.5 billion at the beginning of the month to $845.3 billion by the end.
This data, provided by National Securities Depository Ltd (NSDL) highlights a trend of foreign investors re-evaluating their positions in Indian markets amidst new regulatory frameworks and economic conditions.
