MUMBAI: The central bank Monday laid down the rules a foreign portfolio investor (FPI) must follow, including seeking the Centre's approval for raising equity ownership, once its holding in an Indian company breaches the prescribed 10% regulatory threshold. These norms come in the wake of additional scrutiny by New Delhi to monitor ownership of local financial assets by countries with which it shares a frontier.The current law says an FPI cannot hold more than 10% of the total paid-up equity capital as portfolio investment in an Indian company. The investment is categorised as foreign direct investment (FDI) if the holding exceeds the 10% limit.Until now, there was lack of clarity on how the offshore portfolio manager could go about classifying and reporting the stake once the holding crosses 10%.On Monday, the Reserve Bank of India (RBI) clarified that FPIs need to obtain necessary approvals from the government, especially for investments from land bordering countries. They must adhere to all FDI regulations, including sectoral caps, entry routes, pricing guidelines, among others.Under the regulations, if a foreign fund already holding about 9% buys more shares, say, another 3% in a company, the entire holding of 12% is considered FDI. 115190741This communication from the central bank, pertaining to reclassification of FPI holding into FDI, assumes significance given the screening mechanism that has been put in place since 2020 for FDI from China and other countries with which India shares a frontier. New Delhi has looked at investments from certain destinations with greater scrutiny in national interest.According to the RBI notification published Monday, the FPI should "clearly articulate its intent to reclassify existing foreign portfolio investment held in a company into FDI and shall provide the copy of the necessary approvals and concurrence to its custodian."MNC banks and local financial institutions act as custodians (or bookkeepers) for FPIs.After completing the reporting, the FPI requests its custodian to transfer the shares from its FPI demat account to its FDI demat account. The custodian would unfreeze the shares after verifying the reclassification process. The date of investment causing the breach is considered as the reclassification date.
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