--- title: "Operational framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment (FDI)" date: 2024-12-24 author: "King Stubb & Kasiva" url: https://ksandk.com/newsletter/operational-framework-for-reclassification-of-foreign-portfolio-investment-to-fdi/ --- # Operational framework for reclassification of Foreign Portfolio Investment to Foreign Direct Investment (FDI) Posted On - 24 December, 2024 • By - King Stubb & Kasiva The Reserve Bank of India (“**RBI**”) vide its circular dated November 11, 2024 has introduced a framework governing the **reclassification of Foreign Portfolio Investment (**“**FPI**”**) to Foreign Direct Investment (**“**FDI**”**).** This framework addresses situations where FPI holdings **exceed the regulatory threshold of 10% of paid-up equity capital**on a***fully diluted basis*.** Under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019, Foreign Portfolio Investors are allowed to hold up to 10% of a company’s total paid-up equity capital.[[1]](#_ftn1) However, now, any foreign portfolio investor investing above 10% of the total paid-up equity has the option of **divesting their holdings** or **reclassifying such holdings as FDI.** The framework lists down the requirements for the reclassification process: - **Five trading days** timeline is to be given from the settlement date for reclassification or divestment - Reclassification is not permitted in sectors where FDI is prohibited. - Investors must obtain necessary **governmental approvals**, particularly relevant for investments from **land-bordering countries** (**refer to press note 3 of 2020**[[2]](#_ftn2)). - **Acquisitions exceeding the prescribed limit** must comply with **FDI provisions**, including entry routes, sectorial caps, investment limits, pricing guidelines, and other conditions under **Schedule I to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019**.[[3]](#_ftn3) - The **Indian investee company** (the company receiving the investment) must **explicitly agree** to the **reclassification.** - The operational framework requires **Foreign Portfolio Investors** to clearly articulate their reclassification **intent** to their ***custodian***, who then **freezes purchase transactions**until the **reclassification is complete**. - The entire investment must be reported within the timelines according to the [Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0) , using the **FC-GPR form**[[4]](#_ftn4) for fresh issuances and the **FC-TRS form**[[5]](#_ftn5) for secondary market acquisitions, with the ***Authorized Dealer (AD) bank*** responsible for reporting the divestment. - After completing these reports, the **Foreign Portfolio Investors**requests its**Custodian to transfer the equity instruments to the demat account**for FDI. **The Custodian** ensures all reporting is complete, **then unfreezes the equity instruments** and processes the **transfer.** - The **date of the investment** causing the breach becomes the **official reclassification date**. - Once reclassified as FDI, **status remains** even if the holding **falls below 10%.** - The **Foreign Portfolio Investor** along with its **investor group** shall be treated as a **single person** for the purpose of reclassification of foreign portfolio investment. - The reclassification or divestment must be completed within the prescribed time as per **Schedule II**, and after reclassification, the investment is governed by **Schedule I**.[[6]](#_ftn6) --- [[1]](#_ftnref1) Rule 2(t) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. [[2]](#_ftnref2) [https://dpiit.gov.in/sites/default/files/pn3_2020.pdf](https://dpiit.gov.in/sites/default/files/pn3_2020.pdf) [[3]](#_ftnref3)Foreign Exchange Management (Non-debt Instruments) Rules, 2019  (Schedule 1, pg. 71-94) [[4]](#_ftnref4) [https://www.rbi.org.in/upload/notification/pdfs/40495.pdf](https://www.rbi.org.in/upload/notification/pdfs/40495.pdf) [[5]](#_ftnref5) [https://femaonline.com/assets/media/68828Form%20FC-TRS-final%20new.doc](https://femaonline.com/assets/media/68828Form%20FC-TRS-final%20new.doc) [[6]](#_ftnref6)Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (Schedule 1, pg. 71-94) (Schedule 2, pg. 94-96). --- ## Office Locations - [New Delhi](https://ksandk.com/locations/top-corporate-law-firm-in-delhi/) (HQ): +91-11-41318190 | info@ksandk.com - [Mumbai](https://ksandk.com/locations/top-corporate-law-firm-in-mumbai/): 3 offices (Nariman Point, Lower Parel, Andheri) | mumbai@ksandk.com - [Bangalore](https://ksandk.com/locations/top-corporate-law-firm-in-bangalore/): bangalore@ksandk.com - [Chennai](https://ksandk.com/locations/chennai/): chennai@ksandk.com - [Hyderabad](https://ksandk.com/locations/hyderabad/): hyderabad@ksandk.com - [Pune](https://ksandk.com/locations/pune/): pune@ksandk.com - [Kochi](https://ksandk.com/locations/kochi/): kochi@ksandk.com ## Contact - [Contact Page](https://ksandk.com/contact-us/) - General: info@ksandk.com | +91-11-41318190 - WhatsApp: +91-7428567444 - [Privacy Statement](https://ksandk.com/privacy-statement/) - [Terms of Use](https://ksandk.com/terms-of-use/)