look news india
New Delhi: The government is planning legislative changes in the Foreign Exchange Management Act (FEMA) rules. After this, foreign portfolio investors (FPIs) will easily convert into foreign direct investors (FDI) after acquiring 10 percent ownership. The government is going to take this step after repeated requests from foreign investors. FPIs are looking to ease disclosure requirements after crossing the 10 percent limit.
At present, there are very strict provisions under FEMA, due to which FPIs cannot buy more than 10 percent stake in any company as a strategic investor. But under FDI rules, 100 percent investment is allowed in many sectors. He said that the Department of Economic Affairs is working to solve the problems of such investors.
Speaking about some of the concerns and ambiguities associated with the change from FPI to FDI, informed sources said that the reclassification requires custodians to open separate accounts for securities and depositories. This complicates the disclosure process and also makes matching difficult. It is also not clear how tax will be levied once FDI takes place. This has left investors in uncertainty.
During the process of conversion from FPI to FDI, several challenges arise in the governance of the company which need to be reconsidered. Also, there is uncertainty regarding the status of designated depository participant in the multiple investment manager system.
These issues need to be addressed and clarified and a path provided for a smooth transition from FPI to FDI.
As per the existing provisions, if an FPI invests beyond the prescribed limit, it has to sell its excess stake within five working days from the day of breaching the limit.
If the FPI does not sell the additional stake, the entire investment made by the FPI and its investor group in the company will be considered as an investment under FDI. After this, the FPI and its investor group will not be able to make further portfolio investment in that company.
