The Reserve Bank of India (RBI) on Monday issued an operational framework for reclassification of investments made by a foreign portfolio investor as foreign direct investment (FDI) if the entity fails to comply with the prescribed limit.

Currently, an investment made by a foreign portfolio investor with its investor group (FPI) is expected to represent less than 10 percent of the total released equity on a fully diluted basis.

Any FPI investing in violation of the prescribed limit has the option of disposing of its holdings or reclassifying such holdings as FDI subject to the conditions specified by the RBI and Sebi within five trading days from the date of settlement of the transactions at the origin of the breach.

The RBI has issued an operational framework for reclassification of FPI’s foreign portfolio investments as FDI.

As per the framework, the concerned FPI will have to obtain necessary approvals from the government and the consent of the concerned Indian company in which it invests.

However, the reclassification facility will not be allowed in any FDI-prohibited sector, the RBI said.

For reclassification, the entire investment held by such FPI must be declared within the time limits specified in the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

Once the reporting is completed, the FPI should contact its custodian to request it to transfer the equity instruments of the Indian company from its demat account held for holding foreign portfolio investments to its demat account held for holding FDI, it said the RBI.

These instructions came into force with immediate effect, the central bank added.