Business: The Reserve Bank of India (RBI) on Monday announced an operational framework for reclassification of investment made by a foreign portfolio investor to foreign direct investment (FDI) if the entity breaches the prescribed limit. The central bank issued a statement on the limit issue.

What is the current norms for FPI?

According to the RBI's current norm, an investment made by foreign portfolio investor along with its investor group (FPI) should be less than 10 per cent of the total paid-up equity capital on a fully diluted basis. 

Any FPI investing in breach of the prescribed limit has the option of divesting their holdings or reclassifying such holdings as FDI subject to the conditions specified by the RBI and Sebi within five trading days from the date of settlement of the trades causing the breach.

FPI concerned will have to take necessary approvals: RBI

According to the latest framework, the FPI concerned will have to take necessary approvals from the government and the concurrence of the Indian investee company concerned.

However, the facility of reclassification shall not be permitted in any sector prohibited for FDI, the RBI said.

For reclassification, the entire investment held by such FPI should be reported within the timelines as specified under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

What is FPI?

An FPI (Foreign Portfolio Investment) is a grouping of assets such as stocks, bonds, and cash equivalents which are held directly by an investor or managed by financial professionals.

FPI should approach its Custodian: RBI

Post completion of reporting, the FPI should 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, the RBI said. The directions have become operative with immediate effect, the central bank added.