ARTICLE
25 November 2024

FPI To FDI Reclassification: SEBI, RBI Lay Down SOP

RP
Resolut Partners

Contributor

We are specialised transactional lawyers mainly focused on investment funds, private equity and M&A. Our core specialism is to advise on every aspect across the lifecycle of a fund – from formation, investments, structured transactions, governance issues (fund and portfolio level), to exits and commercial disputes.
EBI, RBI clarify the process for reclassifying FPI investments as FDI
India Corporate/Commercial Law

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

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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