RBI ISSUES OPERATIONAL FRAMEWORK FOR RECLASSIFICATION OF FOREIGN PORTFOLIO INVESTMENT (FPI) TO FOREIGN DIRECT INVESTMENT (FDI)
Economics
Why in the News?
The Reserve Bank of India (RBI) issued a detailed operational framework for the reclassification of investments made by Foreign Portfolio Investors (FPIs) into Foreign Direct Investment (FDI), in cases where the prescribed investment limits are breached. The move is aimed at streamlining the process and ensuring compliance with regulations governing foreign investments in India. The Securities and Exchange Board of India (SEBI) has also released a circular outlining the procedure for this reclassification.
Key Highlights of the New Framework:
- Investment Limit for FPI:
- Foreign Portfolio Investors (FPI) are restricted to holding no more than 10% of the total paid-up equity capital of a company, on a fully diluted basis.
- This limit is in place to prevent excessive influence by FPIs in Indian companies.
- If an FPI breaches the 10% limit, they have two options:
- Divest their holdings to return to compliance with the prescribed investment limit.
- Reclassify their holdings as Foreign Direct Investment (FDI), subject to the conditions set by the RBI and SEBI.
- Reclassification Timeline: In case of a breach, the FPI must take action within five trading days from the date of settlement of the trades that caused the breach. The FPI can either divest or seek reclassification of its investment as FDI within this timeframe.
- RBI and SEBI Regulations:
- The reclassification process is governed by an operational framework issued by the RBI, with additional procedures outlined by SEBI.
- The FPI concerned must obtain necessary approvals from the Indian government and concurrence of the investee company to proceed with reclassification.
- Impact of the Framework:
|
Transition from Portfolio to Direct Investment |
Difference Between FDI and FPI
| Dimension | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
| Involvement | Involves active participation in ownership, control, and management with a long-term interest | No active involvement in management. Investment instruments are easily tradable and do not represent a controlling stake |
| Form | Occurs when a company invests to set up production or facilities in another country | Happens when a foreign entity purchases equity in a company through stock markets |
| Degree of Control | Provides a degree of control in the company | No control in the company |
| Threshold | Investment over 10% is considered FDI | Allowed to invest up to 10% of the paid-up capital |
| Sell-Off / Pull-Out | Difficult to sell or pull out; long-term commitment | Easy to sell or withdraw investments as they are liquid |
| Comes From | Primarily undertaken by multinational organizations | Can come from diverse sources such as pension funds, mutual funds, or individual investors |
| Type of Market | Flows into the primary market | Flows into the secondary market (e.g., stock exchanges) |
| Tenure | Long-term investments | Short-term investments |
| What is Invested / Transferred | Involves financial and non-financial assets like technology and intellectual property | Only financial assets like stocks or bonds |
| Purpose | Targets specific enterprises for long-term growth | Increases capital availability in general |
| Volatility | Considered more stable | Considered less stable, prone to market fluctuations |
| Contribution | Contributes significantly to economic growth, technology, and employment | Contributes mainly through capital flows, less impact on economic growth |