Mumbai: International investors are trying to overcome a hurdle to raise stakes in Indian companies that come across as long bets.They are knocking on the doors of the government and financial market regulators, urging them to rethink a rule that forbids an overseas investor from being a foreign direct investor (FDI) as well as a foreign portfolio investor (FPI) in the same company.The regulation comes in the way of FPIs which buy into startups and other closely-held entities (using the FDI route) from later participating in the initial public offerings (IPOs) - which is treated as a transaction under the FPI route - when some years down the line the entities go for listing.These foreign investors stay invested, track governance standards, and negotiate shareholder rights, to catch the upside on listing. But the strategy falls through, thanks to a regulation that was introduced in 2019.116485867In the past one month, leading foreign investor advocacy groups like Investment Company Institute, Washington, and the Hong Kong headquartered Asia Securities Industry & Financial Markets Association (ASIFMA) have drawn the attention of the RBI, SEBI and finance ministry to the difficulty, two persons told ET.According to Siddharth Shah, a senior partner with the law firm Khaitan & Co, "The restriction by the Reserve Bank of India (RBI) on foreign investors not being able to purchase shares under FPI route where they already have interest under FDI route seems to stem from the fact that RBI views the two routes to be independent as they serve different purposes. FDI is considered to be a strategic long-term investment whereas FPI is intended to be a portfolio investment with the primary objective being economic gains without much strategic intent. This position emerges from the provisions of the master direction on foreign investment in India wherein under the provision 2.9.3, which defines 'foreign investment', a person can acquire shares in an Indian company either as FDI or as FPI. However, in today's complex investment world, such a straight jacketed interpretation of RBI may be misplaced since the same investor for strategic purpose may wish to consolidate their holding in a company by buying additional shares either in an IPO or on the exchange, for both of which they have to do so under the FPI route." RBI, said Shah, has already reconciled to the converse that while a FPI acquires shares under the FPI route but if it wishes to acquire more than 10%, it may do so subject to reclassifying entire ownership to be treated as FDI. "Given this, I do not see a logical reason to resist the move to allow FDI investors to acquire more through the FPI route in the same entity," he said.There are three situations that a foreign investor could face : n Buys into an unlisted startup (under FDI route) but is unable to subscribe to the IPO later;n Consider an FPI which holds say 9% in a company and raises its stake to 12%. With this, the entire 12% is considered as FDI. But it can't purchase stocks from the market if it wants to further increase its holding to say 15%. For this, it has to take the FDI route;n If the FPI (mentioned above), sells its stake to say 7%, the reduced holding is still treated as FDI (and not FPI). Under the circumstances, it cannot buy from the market to raise the stake to anywhere less than 10% - the maximum that an FPI is allowed to hold in a company.According to Prakhar Dua, co-head of the FPI practice at the law firm Nishith Desai Associates, "The legislative intent behind such restriction does not seem to be clear. The FDI and FPI investments are made through separate demat accounts and the latter is merely a portfolio investment with no management or control rights in the Indian investee company. It would be beneficial for an FDI investor to be able to participate further in an IPO under the FPI route. Notably, last year the HK Exchange also relaxed its 'double dipping rules' to allow existing shareholders to further participate in the IPO, subject to fulfilment of certain conditions."A flexibility towards greater fungibility of FDI and FPI rules would enable companies to raise equity in the pre-IPO phase. Some FPIs have tried a work-around by creating a special purpose vehicle below the fund for subscribing to IPOs. "But this is a sharp practice. Under FEMA, an indirect route cannot be taken to achieve what cannot be done directly," said another person. Sources said, while the ministry has asked for further clarification on the subject and SEBI may also be supportive, RBI could well have the last word on the matter. The essence of the regulation was first sensed during the Zomato IPO in 2021. Now more and more foreign investors are urging a review of the rule.