Wooing Foreign Investors: India May Liberalise Forex Rules For Equity Investments — Profit Exclusive

The Indian government may liberalise foreign exchange rules for non-debt instruments, such as equity, mutual funds, and real estate. According to people in the know, the government is examining the possibility of reclassify Foreign Direct Investments (FDIs) as Foreign Portfolio Investments (FPIs) once they are listed.

The move could potentially offer more operational and administrative flexibility, simplifying the process for foreign investors, government sources told NDTV Profit.

The talks are part of an ongoing effort to simplify the Foreign Exchange Management Act (FEMA) regulations to better align them with the current economic situation.

At present, FDIs cannot be reclassified into a foreign portfolio investment. However, if an FPI exceeds a 10% ownership in an Indian company, it can be reclassified as an FDI.

FDI is when an individual or firm invests in a business in another country. While FPIs is when an investor invests in securities or financial assets in another country.

In November 2024, the Reserve Bank of India had put out rules for FPIs whose investments would be reclassified as FDIs the moment it breaches the 10% stake threshold in an Indian company, under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Under FEMA, FPIs are permitted to hold up to 10% of a company's total paid-up equity capital. If an FPI exceeds this limit, it now has the option to either sell off its holdings or reclassify them as Foreign Direct Investment (FDI), subject to certain conditions. The new rules allow a window of five days from the settlement of trades to make this adjustment.

"The goal is to make the investment process smoother and more appealing to foreign investors. Furthermore, the Finance Ministry and other financial regulators are in discussions to bring legislative changes to FEMA rules, with a timeline of about six months," a government official told NDTV Profit.

The potential changes aim to simplify the investment process and offer greater flexibility for foreign investors with an intent to boost foreign capital inflows in the coming months.

According to officials, India has been relaxing rules from July 2024 onwards. In August 2024, it eases cross-border share swaps, allowing the issuance or transfer of equity instruments between a local company and a foreign firm. Under that, investments made by an Overseas Citizen of India or OCI on a non-repatriation basis will no longer be considered as indirect foreign investment.