Syllabus: GS3/ Economy
Context
- The Reserve Bank of India issued an operational framework for reclassification of investment made by a foreign portfolio investor (FPI) to foreign direct investment (FDI) if the entity breaches the prescribed limit.
Background
- Under current regulations, FPIs can hold a maximum of 10% of an Indian company’s total paid-up equity capital.
- Exceeding this cap previously left FPIs with two choices: divesting the surplus shares or reclassifying them as FDI.
| Foreign portfolio investment (FPI) – FPI consists of securities and other financial assets held by investors in another country. – It does not provide the investor with direct ownership of a company’s assets and is relatively liquid depending on the volatility of the market. – FPI holdings can include stocks, American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), bonds, mutual funds, and Exchange-traded funds (ETFs). – It is different from Foreign direct investment (FDI), which is an ownership stake in a foreign company or project made by an investor, company, or government from another country. |
New Framework
- Mandatory Government Approval: FPIs must seek necessary approvals from the government when their equity holdings surpass the set 10% threshold, indicating a reclassification to FDI.
- Timely Reclassification: The RBI mandates that the reclassification process should be completed within five trading days from the date of the transaction that breaches the limit.
- Compliance Requirements;
- Investments must adhere to entry routes, sectoral caps, investment limits, pricing guidelines, and other FDI-specific conditions under the current rules.
- The RBI calls for comprehensive reporting as per the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
- Revised SEBI Guidelines: SEBI requires FPIs that opt for reclassification to inform their custodian, who will temporarily freeze any further equity transactions in the affected company until the conversion process is finalized.
Significance of the New Framework
- Regulatory Compliance: It ensures that the process of transitioning from FPI to FDI is systematic, minimizing regulatory breaches.
- Investment Oversight: It provides better oversight of foreign investments in Indian equity, maintaining the balance between capital inflows and national economic interests.
Source: IE
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