Context:
RBI issues framework for reclassification of FPI to FDI
Reclassification of FPI to FDI:
- Foreign Portfolio Investments (FPIs) can hold up to 10% of an Indian company’s total paid-up equity capital.
- If this limit is exceeded, FPIs must either sell the excess shares or reclassify them as Foreign Direct Investment (FDI).
Guidelines for reclassification of FPI to FDI:
- Government Approvals – FPIs from land-bordering countries need government approval and the investee company’s consent.
- Investments must comply with entry routes, sectoral caps, investment limits, pricing guidelines, and other FDI conditions.
- Timely Conversion – Reclassification must be completed within 5 trading days from the transaction that results in breaching the 10% limit.
- Regulations – Reclassification will follow the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
- Significance – Provide FPIs with greater flexibility to transition to strategic investments
- Prohibited Sectors – Reclassification is not allowed in sectors where FDI is prohibited, such as chit funds and gambling.
- It complements a similar reform from the Securities and Exchange Board of India (SEBI) which mandates that once an FPI exceeds the 10% equity threshold, it may opt to convert the holdings to FDI.
Read more about Foreign Direct Investment (FDI) vs. Foreign Portfolio Investment (FPI)
Source: The Indian Express
Previous Year Question
Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which of the following statements best represents an important difference between the two?
[UPSC Civil Service Exam – 2011 Prelims]
(a) FII helps bring better management skills and technology, while FDI only brings in capital.
(b) FII helps in increasing capital availability in general, while FDI only targets specific sectors.
(c) FDI flows only into the secondary market, while FII targets the primary market.
(d) FII is considered to be more stable than FDI
Answer: (b)