In Mumbai, international investors are facing a challenge when they want to invest in Indian companies for the long run. They are asking the government and financial regulators to change a rule. Right now, if a foreign investor buys shares in an Indian startup using the Foreign Direct Investment (FDI) method, they cannot also invest in the same company using the Foreign Portfolio Investment (FPI) method later.
This rule makes it hard for investors who want to stay with a company for a long time. These investors want to support startups, track how well they are doing, and later earn money when the company goes public through an Initial Public Offering (IPO). Unfortunately, this rule, made in 2019, is stopping them from doing so.
Recently, important groups like the Investment Company Institute from Washington and the Asia Securities Industry & Financial Markets Association based in Hong Kong have reached out to the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the finance ministry to address this problem.
Siddharth Shah, a senior partner at a law firm, explains that the RBI sees FDI and FPI as two different types of investments. FDI is a long-term investment, while FPI is more about making quick money without long-term commitment. But with today’s complex investing environment, this strict rule might not make sense anymore. Investors may want to increase their shares, but they are forced to follow complicated regulations to do so.
For example, a foreign investor may buy shares in an unlisted startup (under FDI) but then can’t buy more shares when the company goes public (under FPI). Another scenario is if an FPI holds 9% in a company and wants to increase it to 12%. This new 12% would be seen as FDI, making it difficult to buy shares from the market to reach 15%.
Some FPIs have tried to find solutions by creating special companies to invest in IPOs, but this is not allowed under India’s rules.
The good news is that while the finance ministry has asked for more details, and SEBI seems open to change, the RBI might have the final say. Investors hope to change the rules and make it easier to invest in Indian startups.
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