Skip to main content

Operational framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment (FDI)

Reserve Bank of India (RBI) has released operational framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment (FDI).

What is Foreign Portfolio Investment?

Foreign portfolio investment means any investment made by a person resident outside India through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company. 

Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised.

Foreign Portfolio Investor (FPI) means a person registered in accordance with the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.

What is Foreign Direct Investment (FDI)?

Foreign Direct Investment (FDI) means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

In case an existing investment by a person resident outside India in equity instruments of a listed Indian company falls to a level below 10%, of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI.

What are the rules for purchase or sale of equity instruments by FPIs?

FPI may purchase or sell equity instruments of an Indian company listed or to be listed on a recognised stock exchange in India subject to the following conditions –

  • The total holding by each FPI or an investor group, shall be less than 10% (called individual limit) of the total paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company.
  • The total holdings of all FPIs put together, including any other direct and indirect foreign investments in the Indian company, shall not exceed 24% (called aggregate limit) of paid-up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or share warrants.
  • With effect from April 1, 2020, the aggregate limit shall be the sectoral caps applicable to the Indian company as per Schedule I of Foreign Exchange Management (Non-debt Instruments) Rules, 2019. The aggregate limit with respect to an Indian company in a sector where FDI is prohibited shall be 24%.

What if foreign portfolio investment exceeds the prescribed limit?

  • The FPIs investing in breach of the prescribed limit shall have the option of divesting their holdings within 5 trading days from the date of settlement of the trades causing the breach. 
  • In case the FPI chooses not to divest, then the entire investment in the company by such FPI and its investor group shall be considered as investment under FDI and the FPI and its investor group shall not make further portfolio investment in the company concerned. 
  • The FPI, through its designated custodian, shall bring the same to the notice of the depositories as well as the concerned company for effecting necessary changes in their records, within 7 trading days from the date of settlement of the trades causing the breach. 

What is the operational framework of RBI for reclassification of investments by FPIs to FDI?

In case the FPI intends to reclassify its foreign portfolio investment into FDI, the FPI shall follow the operational framework as given below –

  • The facility of reclassification shall not be permitted in any sector prohibited for FDI.
  • The FPI concerned shall obtain the following approvals / concurrence –
    • Necessary approvals from the Government and ensure that the acquisition beyond prescribed limit is in accordance with the FDI rules.
    • Concurrence of the Indian investee company concerned for reclassification of the investment to FDI to enable such company to ensure compliance with FDI rules.
  • FPI 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.
  • 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.
  • 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 –
    • 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.
    • 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.
    • AD bank concerned shall report the amount of reclassified foreign portfolio investment as divestment under the LEC (FII) reporting.
  • 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 shall be considered as the date of reclassification. 
  • 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 10% subsequently. 
  • FPI along with its investor group shall be treated as a single person for the purpose of reclassification of foreign portfolio investment.
  • Post reclassification of foreign portfolio investment to FDI, the said investment shall be governed by Schedule I to Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

What are other rules for investments by FPIs?

  • FPI may, undertake short selling as well as lending and borrowing of securities.
  • FPI may purchase units of domestic mutual funds or Category III Alternative Investment Fund or offshore fund for which no objection is issued in accordance with the SEBI (Mutual Fund) Regulations, 1996, which in turn invest more than 50% in equity instruments on repatriation basis.
  • FPI may purchase units of REITs and InVITs on repatriation basis.


References

Government of India. (2019, October 17). 'Foreign Exchange Management (Non-debt Instruments) Rules, 2019'. Retrieved from https://enforcementdirectorate.gov.in/sites/default/files/Act%26rules/Foreign%20Exchange%20Management%20%28Non-Debt%20Instrument%29%20Rules%2C%202019%20-%20without%20amendment_2.pdf

Reserve Bank of India. (2024, November 11). 'Operational framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment (FDI)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12749&Mode=0

Reserve Bank of India. (2024, November 11). 'Operational framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment (FDI) under Foreign Exchange Management (Non-debt Instruments) Rules, 2019'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=59073


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Framework for recognition of Self-Regulatory Organisation (SRO) for Payment System Operators (PSOs)

Reserve Bank of India (RBI) had released the framework for recognition of Self-Regulatory Organisation (SRO) for Payment System Operators (PSOs). What is the need of Self-Regulatory Organisation (SRO) for Payment System Operators (PSOs)? Industry self-governance helps in industry-wide smooth operations and ecosystem development. RBI’s Payment and Settlement Systems Vision 2019-21 had, therefore, envisaged the setting up of an SRO for PSOs. Accordingly, the framework for recognition of SRO for PSOs was released in October 2020. What shall be the role of SRO for PSOs? An SRO is a non-governmental organisation that sets and enforces rules and standards relating to the conduct of member entities in the industry, with the aim of protecting the customer and promoting ethical and professional standards.  The SRO is expected to resolve disputes among its members internally through mutually accepted processes to ensure that members operate in a disciplined environment and even accept penal ...
Post a Comment
Read more

RBI’s Monetary Policy (December 05, 2025): In A Nutshell

The bi-monthly monetary policy of Reserve Bank of India (RBI) was announced on December 05, 2025. Here are some of the highlights of the monetary policy announcement. Rates   Change Rate Policy repo rate Reduced by 25 bps 5.25% Standing deposit facility (SDF) rate 5.00% Marginal standing facility (MSF) rate 5.50% Bank rate 5.50% Monetary policy stance Monetary policy stance unchanged as ‘neutral’. Domestic Economy  Real Gross Domestic Product (GDP) growth accelerated to 8.2% in Q2, buoyed by strong spending during the festive season which was further facilitated by the rationalisation of the goods and services tax (GST) rates.  Real GDP growth for 2025-26 is projected at 7.3%. For the first time since the adoption of flexible inflation targeting (FIT), average headline inflation for a quarter at 1.7% in Q2, breached the lower tolerance threshold (2%) of the inflation target (4%). It dipped further to an all-time low of 0.3% in October 2025. The underlying inflation pressu...
Post a Comment
Read more

National Strategy for Financial Inclusion (NSFI) 2025-30

Reserve Bank of India (RBI) has published National Strategy for Financial Inclusion (NSFI) 2025-30. Financial Inclusion The Committee on Financial Inclusion (Chairman: Dr C Rangarajan, RBI, 2008) defined financial inclusion as “the process of ensuring access to financial services, timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost”. The Committee on Medium-Term Path to Financial Inclusion (Chairman: Shri Deepak Mohanty, RBI, 2015) viewed financial inclusion as, “convenient access to a basket of basic formal financial products and services that should include savings, remittance, credit, government-supported insurance and pension products to small and marginal farmers and low income households at reasonable cost with adequate protection progressively supplemented by social cash transfers, besides increasing the access of small and marginal enterprises to formal finance with a greater reliance on technology to cut costs an...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-II – Section 17 to 19

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the second article in the series.  Section 17 – Business which the Bank may transact RBI shall be authorized to carry on and transact the several kinds of business hereinafter specified, namely – 17(1) – Accept deposit without interest from the Central / State Government, local authorities, banks and any other persons. 17(1A) – Accept deposit, repayable with interest, from banks or any other person under the Standing Deposit Facility Scheme, as approved by the Central Board, for the purposes of liquidity management.   Bills of Exchange (B/E) & Promissory Note (PN) Bearing 2 or more good signatures, one of which shall be of B/E & PN arising out of Maturing within 17(2)(a) Purchase, sale and rediscou...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-V – Section 45B to 45JA

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the fifth article in the series.  Chapter IIIA - Collection and Furnishing of Credit Information Section 45B – Power of Bank to collect credit information RBI may collect credit information from banking companies and furnish it to any banking company in accordance with section 45D. Section 45C – Power to call for returns containing credit information RBI may direct any banking company to submit statements relating to credit information. Section 45D – Procedure for furnishing credit information to banking companies A banking company may apply to RBI to provide credit information. RBI shall furnish the requested credit information without disclosing the names of the banking companies which have submitted the information. RBI may levy fees of up to Rs.25 for furnishing credit...
Post a Comment
Read more