MUMBAI: The Reserve Bank of India (RBI) and the Securities and Exchange Board (Sebi) have 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 direction better aligns with the Fema rules, the regulators said in separate notifications Monday and helps lift the current 10 percent cap on such investments, with prior government nod.
The regulators have issued an operational framework 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 percent threshold for investments made by FPIs in the total paid-up equity capital of a company. Any FPI breaching this limit has the option to divest its holdings or reclassify them as FDI, subject to several conditions. The rules provide a window of five days from the settlement of trades to do the same.
The notifications further say that investors have to obtain prior government approval before making the additional investments. Further, FPIs have to explain the intention to reclassify the investment as FDI, too.
However, 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 circulars.
Following reclassification, the entire investment of an FPI in a company can be considered an FDI and will continue to be classified as such even if it falls below 10 per cent.
The regulators have also 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,” said the circular.