Section 194N Exemption for Foreign Representations: Key Highlights of the New Income-Tax Notification

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  On 28th November 2024 , the Ministry of Finance issued Notification No. 123/2024 , bringing clarity to the applicability of Section 194N of the Income-tax Act, 1961. The notification exempts specified foreign representations from the provisions of this section, reinforcing India's commitment to international diplomatic norms and global cooperation. Effective from 1st December 2024 , this move comes after due consultation with the Reserve Bank of India (RBI) and aligns with international protocols such as the Vienna Convention and the United Nations Privileges and Immunities Act . Understanding Section 194N of the Income-tax Act Section 194N mandates tax deduction at source (TDS) on cash withdrawals exceeding ₹1 crore in a financial year . The provision applies to withdrawals from banks, co-operative banks, and post offices, aiming to curb cash usage and promote digital transactions. Fifth Proviso to Section 194N The fifth proviso grants the Central Government the authority ...
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SEBI’s New Circular on FPI to FDI Reclassification: Simplified Procedure for Foreign Investments in India

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On November 11, 2024, SEBI issued a new circular streamlining the procedure for reclassifying Foreign Portfolio Investor (FPI) holdings as Foreign Direct Investment (FDI). These updated guidelines affect FPIs, Designated Depository Participants (DDPs), custodians, depositories, stock exchanges, and clearing corporations. This procedural change simplifies compliance for foreign investors, aligning with India’s Foreign Exchange Management Act (FEMA) and the SEBI (Foreign Portfolio Investors) Regulations, 2019. In this blog, we delve into SEBI’s latest guidelines, the rationale behind them, and how they impact the stakeholders involved in foreign investments in Indian companies.

Background: The Need for FPI to FDI Reclassification

Foreign Portfolio Investors (FPIs) are foreign entities that invest in Indian securities, but their holdings are subject to certain thresholds. When an FPI’s ownership in a particular company crosses a 10% threshold of the company’s equity on a fully diluted basis, SEBI’s regulations mandate that the investment be reclassified as Foreign Direct Investment (FDI). This rule aims to distinguish between short-term portfolio investments and longer-term, strategic foreign investments, ensuring appropriate regulatory oversight and compliance with FEMA.

SEBI’s New Circular on FPI to FDI Reclassification

The new circular builds on SEBI’s 2019 FPI regulations, particularly Regulations 20(7) and 22(3). If an FPI’s ownership in an Indian company surpasses the 10% limit, the entire holding—including holdings by related investor groups—must be reclassified as FDI. SEBI’s latest circular provides a simplified, systematic approach to handle this reclassification and mandates a specific process for custodians and FPIs to follow.

Key Provisions of the SEBI Circular on FPI Reclassification

1. Threshold for Reclassification

  • When an FPI (including its investor group) holds 10% or more of a company’s equity, the investment must be reclassified as FDI.
  • This threshold ensures that FPIs with substantial holdings comply with FDI rules under FEMA, providing a clear boundary between portfolio and direct investments.

2. Custodian Responsibilities

  • Once an FPI’s intent to reclassify its holdings as FDI is communicated, the custodian must freeze any further purchase transactions by the FPI in that specific Indian company.
  • The custodian is responsible for informing SEBI about the FPI’s intent to convert its holdings, ensuring that no additional portfolio investments are made by the FPI during the reclassification process.

3. Process for Equity Instrument Transfer

  • After reporting the intent to reclassify, the FPI must request the transfer of its equity instruments from its FPI demat account to its FDI demat account.
  • The custodian will only process this transfer once all required reporting for reclassification, as specified by the Reserve Bank of India (RBI), is complete.

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