RBI Unveils New Framework for FPI to FDI Conversion

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