Operational Framework for reclassification of FPI to FDI
Introduction:
Under the FEM (NDI) Rules, 2019, an FPI must not exceed 10% of the total paid-up equity capital of an Indian company. If this limit is breached, the FPI has the option to either divest its holdings or reclassify the excess investment as FDI within five trading days of the breach.
Reclassification of FPI to FDI:
- Reclassification is not allowed in sectors where FDI is prohibited.
- The FPI must obtain necessary government approvals, including for investments from land-border countries, and ensure compliance with FDI sectoral caps and other conditions.
- The Indian company must give its concurrence to the reclassification to ensure compliance with FDI rules.
Reclassification Procedure and Reporting :
- Upon deciding to reclassify FPI holdings as FDI, the FPI must ensure that the entire investment is reported in compliance with the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
- Indian companies must report the investment beyond the prescribed limit using Form FC-GPR (if it results from a fresh equity issuance).
- FPIs must report using Form FC-TRS (if the investment is through the secondary market).
- The AD bank will report the reclassified FPI investment as a divestment under the LEC (FII) reporting.
- Effective Date of Reclassification:
The date when the investment causes the breach of the prescribed limit will be treated as the official date of reclassification. From that point onward, the entire investment will be considered as FDI, and it will continue to be governed by FDI regulations, even if the FPI’s shareholding later drops below 10%.
The reclassification or divestment of the excess investment must be completed within the prescribed five trading days.
Himanshu Shekhar Audit Associate, SW
