Skip to main content

Operational framework for reclassification of Foreign Portfolio Investment (FPI) 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

Trade Receivables Discounting System (TReDS)

Reserve Bank of India (RBI) has issued the directions on Trade Receivables Discounting System (TReDS). What is TReDS? TReDS is a technology platform on a digital or electronic network for facilitating factoring of trade receivables through multiple financiers. What is a Factoring Unit? Factoring unit refers to trade receivable in the form of invoice / bill uploaded either by the seller (in the case of factoring) or by the buyer (in case of reverse factoring), as the case may be. Who are the participants in TReDS? Seller – Micro, Small and Medium Enterprise (MSME) Buyer – any person liable to the seller, whether under a contract or otherwise, against an invoice or bill of exchange, to pay any trade receivable Financier – all entities / institutions permitted to undertake factoring business under the Factoring Regulation Act, 2011 Insurance companies  Credit Guarantee Fund Trust notified by the Government of India Who can operate TReDS platforms? An entity shall seek authorisation fr...
Post a Comment
Read more

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more

Swap Facility for FCNR (B) Deposits, ECBs and OFCBs (updated as on June 23, 2026)

Reserve Bank of India (RBI) has introduced US Dollar-Rupee swap facility for Foreign Currency Non-Resident (Bank) [FCNR (B)] deposits, External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs). Swap facility for FCNR (B) deposits Swap facility for ECBs and OFCBs The swap facility has been introduced for fresh FCNR (B) deposits, including deposits that are renewed upon maturity, for a minimum tenor of 3 years and a maximum tenor of 5 years. The swap facility has been introduced for – ECBs of average maturity of 3 years and above, drawn on after June 8, 2026 till December 31, 2026 by – (a) Public Sector Undertakings (PSUs) whose majority ownership is held by the central and / or state government (other than banks), or (b) PSUs which are incorporated, established or registered under a Central or State Act and controlled by the central / state government. The facility will also be available for the undrawn portion of any exist...
Post a Comment
Read more

Kisan Credit Card (KCC) Scheme

Reserve Bank of India (RBI) has issued directions on Kisan Credit Card (KCC) Scheme. To whom are the directions applicable? The directions are applicable to the following entities – Commercial Banks (excluding overseas branches of Indian banks) Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) Central Co-operative Banks (CCBs) To which loans shall the directions be applicable? The directions shall be applicable to loans sanctioned under the KCC Scheme with effect from January 01, 2027.  What are the crop seasons? Crop season means the period up to harvesting and marketing of the crops raised. Short duration crops shall mean crops with anticipated period from sowing to marketing up to 12 months. Long duration crops mean crops which are not short duration crops. The crop season for long duration crops i.e., anticipated period from sowing to marketing is more than 12 months and up to 18 months. For the purpose of the KCC...
Post a Comment
Read more

Lead Bank Scheme (LBS)

Reserve Bank of India (RBI) has issued guidelines on the Lead Bank Scheme (LBS). Who is a Lead Bank? RBI designates a commercial bank as Lead Bank in each district, to coordinate the efforts of the banks, Government, National Bank for Agriculture and Rural Development (NABARD) and other stakeholders at the district level to improve credit flow to the priority sectors and promote financial inclusion in the district. 12 public sector banks and 2 private sector banks (Jammu & Kashmir Bank and ICICI Bank) have been assigned lead bank responsibilities, covering 778 districts across the country. What appointments are made under the LBS? Every lead bank shall appoint a Lead District Manager (LDM) in each district where it has the lead bank responsibility, to exclusively oversee and coordinate the implementation of the LBS in the district. NABARD shall appoint a District Development Manager (DDM) for each district to act as a liaison between NABARD and the district-level banking and financ...
Post a Comment
Read more