The new system would become effective May 1 this year, the Securities and Exchange Board of India (Sebi) said in a circular.
The framework has been put in place in consultation with RBI to facilitate the companies to ensure compliance with various foreign investment limits.
"The system for monitoring the foreign investment limits in listed Indian companies shall be implemented and housed at the depositories - NSDL and CDSL," the regulator noted.
A company will have to appoint any one depository as its designated depository for the purpose of monitoring the foreign investment limits.
This data includes the paid-up equity capital of the company on a fully diluted basis - total number of shares that would be outstanding if all possible sources of conversion are exercised.
The depositories need to provide an interface wherein a firm will have to give information including Company Identification Number (CIN), details of shares held by FPI, NRIs and other foreign investors in demat as well as in physical form, details of indirect foreign investment which are held in both demat and physical form.
In an event of any change in any of the details pertaining to the company, such as increase or decrease of the aggregate FPI or NRI limits or the sectoral cap or a change of the sector of the company, the firm needs to inform such changes along with the supporting documentation to its designated depository.
A red flag will be activated in case total foreign investment in a company is within 3 per cent or less than 3 per cent of the sectoral cap, the regulator noted.
Under the new system, depositories need to inform the exchanges about the activation of the red flag for the identified scrip. Further, the exchanges will issue the necessary notifications on their respective websites.
"Once a red flag has been activated for a given scrip, the foreign investors shall take a conscious decision to trade in the shares of the scrip, with a clear understanding that in the event of a breach of the aggregate limits or the sectoral cap, the foreign investors shall be liable to disinvest the excess holding within five trading days ," Sebi noted.
Such excess shares should be sold to domestic investors.
Besides, the regulator has asked depositories to put in place the necessary infrastructure and IT systems for operationalising the monitoring mechanism.