The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) introduced new guidelines for foreign portfolio investors (FPIs) to convert excess equity investments into foreign direct investments (FDI). If an FPI exceeds the prescribed 10% cap on a company’s equity, the new rules stipulate that the FPI must seek government approval and consent from the investee company.
Under the Foreign Exchange Management Act (Fema), FPIs are typically permitted to hold up to 10% of a company's paid-up equity capital. Any breach of this limit gives FPIs the option to either divest their excess stake or reclassify it as FDI, subject to certain conditions. The reclassification process must be completed within five days from the settlement of the trade.
Once reclassified, the entire FPI investment will be considered as FDI, even if the stake falls below 10% later. Experts noted that the new framework clarifies that government approval is mandatory before making additional investments beyond the prescribed threshold. Additionally, FPIs must explicitly state their intent to reclassify their investments as FDI.
This move is expected to allow greater foreign investment in Indian companies by providing a mechanism for FPIs to exceed the 10% limit. However, reclassification to FDI is restricted in certain sectors, particularly where government approvals and sectoral caps apply. The new rules also highlight the necessity of compliance with FDI norms and approvals, especially in cases involving investments from countries sharing a land border with India.
