SEBI has, by way of its circular dated April 5, 2018 (‘Circular’), issued guidelines for monitoring of foreign investment limits (based on the paid-up equity capital of the company on a fully diluted basis) in listed Indian companies. The Foreign Exchange Management Act, 1999 (‘FEMA’), read with the regulations issued thereunder, prescribes the various foreign investment limits in listed Indian companies such as the aggregate FPI limit, the aggregate NRI limit and the sectoral caps. The onus of compliance with these foreign investment limits rests on the Indian company.  In order to facilitate compliance by listed Indian companies, SEBI formulated a framework with effect from June 1, 2018.

The necessary infrastructure and IT systems for monitoring the limits in Indian listed companies are required to be implemented and housed at the depositories i.e. National Securities Depository Limited and Central Depository Securities Limited. Companies will have to appoint any one depository as its ‘Designated Depository’ for monitoring the foreign investment limits. The stock exchanges will provide the data on the paid-up equity capital of an Indian company to such company’s Designated Depository.

A red flag will be activated whenever the foreign investment is within 3% or less than 3% of the aggregate FPI / NRI limits or the sectoral cap. Once a red flag has been activated for a given company, the foreign investors will take a conscious decision to trade in the shares of the company, with a clear understanding that in the event of a breach of the aggregate FPI / NRI limits or the sectoral cap, the foreign investors will be liable to disinvest the excess holding within five trading days from the date of settlement of the trades.