Under current regulations, foreign portfolio investment (FPIs) can hold a maximum of 10% of an Indian company’s total paid-up equity capital (amount of money that a company receives from shareholders in exchange for shares).

• Exceeding this 10% cap (prescribed limit of FPI) had previously left FPIs with two choices: Divesting (selling off) the surplus shares or reclassifying them as Foreign Direct Investment (FDI).
• In case the FPI intends to reclassify its FPI into FDI, the FPI shall follow the operational framework as given below:

RBI’S New Operational Framework on reclassification of FPI to FDI

• The facility of reclassification shall not be permitted in sectors prohibited for FDI. E.g., Chit funds, gambling, etc.
• FPI investments require government approvals, especially from land-bordering countries, and need Indian investee company's concurrence.
  •  Also, investment should be in adherence to entry route, sectoral caps, investment limits, pricing guidelines, and other attendant conditions for FDI under the rules.
•  FPI reclassification will be guided by Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

Significance: Becomes easier to attract more foreign investment; Offer greater flexibility to FPI to transit to a more strategic investment, enhance clarity and transparency for foreign investors in the Indian market.