RBI’s New Rule: Foreign Investors Can Reclassify Excess Holdings as FDI
The Reserve Bank of India (RBI) has announced a new rule for foreign portfolio investors (FPIs) who invest more than the allowed 10% in a company. These investors now have the choice to either sell their extra shares or change them into foreign direct investment (FDI). Previously, FPIs and their investor groups were required to keep their investments below 10% of a company’s total equity. The RBI has provided a detailed plan for how this reclassification can happen.
If an FPI wants to change its investment to FDI, it must get approval from the government and the Indian company it has invested in. This new rule is effective immediately. However, this option is not available for sectors where FDI is not allowed. FPIs must clearly state their intention to reclassify their investments and provide the necessary approvals. Once an investment is reclassified as FDI, it will remain as such even if it later falls below the 10% threshold.
Doubts Revealed
RBI -: RBI stands for the Reserve Bank of India, which is the central bank of India. It manages the country’s currency and monetary policy.
Foreign Investors -: Foreign investors are people or companies from other countries who invest money in businesses or assets in India.
Reclassify -: Reclassify means to change the category or classification of something. In this case, it means changing the type of investment from one category to another.
FDI -: FDI stands for Foreign Direct Investment. It is when a foreign investor invests directly in a business or company in another country, like India.
FPIs -: FPIs are Foreign Portfolio Investors. They invest in financial assets like stocks and bonds in a foreign country, but do not have direct control over the businesses.
10% investment limit -: The 10% investment limit is a rule that says foreign portfolio investors can only own up to 10% of a company’s shares. If they own more, they need to take action like reclassifying their investment.
Divest -: Divest means to sell off or get rid of an investment. In this context, it means selling shares to reduce ownership below the 10% limit.
Government and company approval -: This means that both the government and the company where the investment is made must agree to the reclassification of the investment.
FDI prohibited sectors -: These are areas of business where foreign direct investment is not allowed by the government, like certain defense or agriculture sectors.
