SEBI Introduces New Rules to Reclassify Foreign Investments Above 10% Stake

Source: SEBI

The Securities and Exchange Board of India (SEBI) has announced updated guidelines for foreign investors who need to change their type of investment in Indian companies. This change affects certain types of foreign investments, known as foreign portfolio Investments (FPI) and foreign direct investment (FDI).

• Foreign Portfolio Investment (FPI): This is when foreign investors buy shares or bonds in an Indian company but don’t try to control or manage the company. FPIs are usually smaller or more passive investments.
• Foreign Direct Investment (FDI): This is a more significant investment, where foreign investors hold a larger stake in a company and may have more say in its management. FDI investors usually intend to be more directly involved with the business.

Under SEBI’s new rules, if a foreign investor (or a group of investors connected to them) holds 10% or more of a company’s shares, they need to either reduce their holdings within five days or follow SEBI’s process to switch their investment type from FPI to FDI.

New Reclassification Procedure

1. Threshold Rule: If an FPI investment (along with its investor group) reaches 10% or more of a company’s paid-up equity capital, the investor must either divest the excess or reclassify their holding from FPI to FDI.
2. Custodian Notification and Freeze: When an investor decides to reclassify, they must inform their custodian, who then notifies SEBI. The custodian will temporarily freeze further purchase transactions by this investor in the company until the reclassification is complete.
3. Transfer Process for Reclassification: Upon receiving a formal reclassification request, the custodian will transfer the investor’s shares from their FPI demat account to an FDI demat account specifically maintained for FDI holdings. However, this transfer will only proceed if the Reserve Bank of India (RBI) reporting requirements for reclassification are met.

Regulatory Authority and Objective

SEBI has issued this circular under its authority from Section 11(1) of the SEBI Act, 1992, alongside Regulations 20(7), 22(3), and 44 of the SEBI (Foreign Portfolio Investors) Regulations, 2019. This update aims to protect investors, ensure market transparency, and maintain regulatory control over significant foreign investments. These changes are effective immediately.

Purpose of These Changes

SEBI’s updated rules are designed to keep the Indian stock market regulated and transparent. SEBI aims to protect all investors and maintain market stability by ensuring that larger investments follow stricter guidelines.

These changes are effective immediately, and SEBI has issued them under its powers to oversee and regulate the stock market, protecting investors and promoting fair practices.

For more details, the official circular is available on SEBI’s website under the “Legal — Circulars” section.