The Reserve Bank of India has recently notified that shares held by foreign portfolio investors (FPIs) in listed Indian companies in excess of the 10% investment cap will either have to be divested or reclassified as foreign direct investment (FDI). Moreover, on reclassification, further portfolio investments will be barred in the Indian company.

Previously, FPIs breaching this cap had two (2) options: (i) divestment within five (5) trading days; or (ii) reclassification of their entire investment, along with the investment of their associated investor group holdings, as FDI.

The RBI has now clarified that FPI investments in sectors in which FDI is prohibited have no choice but to divest. In sectors where reclassification is permitted, FPIs must obtain necessary government approvals (including under Press Note 3/2020, if applicable), ensure compliance with FDI laws (including entry routes, sectoral caps, investment limits, pricing guidelines, and other FDI conditions), and secure the Indian investee company’s concurrence prior to acquiring equity instruments beyond the prescribed limit. Additionally, the Indian company must file Form FC-GPR for primary market acquisitions by the FPI, and the FPI must file Form FC-TRS for secondary market acquisitions.

FPIs exceeding the investment cap limits and the investee companies will have to start work on complying with the RBI notification.