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RBI Unveils New Framework for FPI to FDI Conversion

The Reserve Bank of India (RBI) has introduced a new framework for Foreign Direct Investment (FDI) conversion for Foreign Private Institutions (FPIs).

Regulatory Framework & Timeline

  • RBI introduced operational framework allowing FPIs to reclassify investments as FDI
  • FPIs must complete reclassification within 5 trading days of breaching 10% Equity threshold
  • Framework effective from November 2024, complementing SEBI's May 2024 guidelines
  • Conversion mandatory when FPI holdings exceed 10% of company's paid-up equity
  • Process requires both government approval and investee company's consent

Compliance & Restrictions

  • FPIs must report under Foreign Exchange Management Regulations 2019

Custodians required to:

    • Notify SEBI of the breach
    • Freeze further equity transactions until reclassification
    • Transfer securities from FPI demat account to FDI account
  • Reclassification prohibited in sectors with FDI restrictions
  • Once converted to FDI, investment remains classified as FDI even if holdings fall below 10%
  • Special approvals needed for investments from land-bordering countries

Impact & Expert Insights

  • Enhances ease of doing business in India
  • Provides flexibility for FPIs to transition to strategic, long-term investments

May affect tax implications:

    • Tax Deducted at Source (TDS) applicable on post-reclassification sales
    • Different tax treatment for reclassified investments
  • Experts view it as a positive move for foreign investment climate
  • Creates structured pathway for FPIs to maintain investments beyond threshold
  • Maintains regulatory oversight while offering operational flexibility

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