The Reserve Bank of India (RBI) on Monday effectively eased the capital controls on foreign portfolio investors (FPIs), by allowing them to transition into foreign direct investment (FDI) smoothly under a new operational framework.
While FPI by a single investor or investor group in an Indian listed company will continue to be capped at 10%, any such entity wanting to raise the holding will now have the option of turning the entire investments into FDI without having to divest the extant stake, and coming in via the FDI route afresh.
The facility would, however, be subject to the conditions specified by the RBI and the Sebi within five trading days from the date of settlement of the trades causing the breach, the central bank said. Also, the FPI will have to take necessary approvals from the government and concurrence of the Indian investee company concerned.
Analysts are divided on whether the move would encourage capital inflows into the country or whether it will promote a shift from short-term speculative investments typical of FPIs to more stable, long-term commitments associated with FDIs.
While many believe that the easier reclassification of FPI into FDI would lead to increased capital inflow into productive sectors of the economy, and capital formation, others cited the fact that the investee companies may not give their nod in most cases for such smooth transition.
According to Nagesh Kumar, member of the RBI’s Monetary Policy Committee, allowing FPI investors to go beyond 10% of capital “may lead to several major Indian companies coming under the control of speculators.” He said the move amounted to giving equal treatment to FDI and FPI, and called it “unwarranted.”
The RBI’s move is line with the report of the Arvind Mayaram Committee, which, following an announcement in Budget FY14 to remove the ambiguity in the definitions of foreign investments, recommended that such investment of 10% or more in a listed company be treated as FDI.
Mayank Arora, Director-Regulatory Nangia Anderson said it is unlikely that the move would have a big impact on FDI numbers, which remained subdued in the last two years. “It has been going around for some time. The World Bank and many other agencies stick to the 10% threshold for distinguishing between strategic and non-strategic investments. It was also suggested by the Mayaram committee. The new framework is a culmination of these developments, with the transition procedure codified.”
He added that in practical terms too, any any FPI holding more than 10% in a listed company’s stock is unlikely given that the Sebi also keeps the threshold at10%.
However, according to Rajesh Sinha, senior research analyst at Bonanza, the easier reclassification of FPI into FDI may encourage foreign investors to adopt a long-term perspective on their investments in India, and foster deeper economic ties and collaboration.“The operational framework is expected to simplify the process for foreign investors by providing clear guidelines on how to transit from FPI to FDI status within a specified timeframe of five trading days. This clarity helps reduce bureaucratic hurdles and enhances the overall investment experience,” he said.
Sunil Kumar Tax Partner EY India said: “There may be cases here and there where investors decide to use FPI route to shift to FDI. In most cases, they would come in directly as FDI.”
Natasha Treasurywala, partner at Desai & Diwanji, said the RBI’s new framework could be helpful to certain FPIs who wish to invest more than 10% in a listed target company. “This will help bolster foreign investment in the country. The restriction on FPIs to invest more than 10% in a company was making it difficult for long-term foreign investors looking to invest a sizeable amounts in India,” he said. The fungibility would enable certain investors freedom to manage their investments, she said.
According to the RBI framework, for reclassification, the entire investment held by such FPI should be reported within the timelines as specified under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
Post completion of reporting, the FPI should approach its custodian with a request for transferring the equity instruments of the Indian company from its demat account maintained for holding foreign portfolio investments to its demat account maintained for holding FDI. The directions have become operative with immediate effect.