India: FEMA, SEBI And Other Laws Related To Securities (Securities Law: October 2016 - December 2016)

Notification of Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2016

Securities and Exchange Board of India ("SEBI") has, vide its notification dated November 30, 2016, amended the SEBI (Real Estate Investment Trusts) Regulations, 2014 ("Regulations"). Under the amended regulations, definition of real estate or property has been broadened by introducing within its ambit rent generating or income generating hotels, hospitals, convention centres, and additionally common infrastructure, industrial parks and Special Economic Zones ("SEZ").

The Amendment further has inserted a new sub – regulation to sub- regulation(2) of the Regulations whereby the slabs for minimum initial offer size and public floats proposing to be raised by the Real Estate Investment Trust ("REIT") are introduced and are produced below:


# Post issue capital Offer size (minimum)
1. Less than INR 1,600 crores 25% OR INR 250 crores, whichever is higher
2. Equal to or more than INR 1,600 crores but less than INR 4,000 crores INR 400 crores
3. Equal to or more than 4,000 crores 10%

However, the public float in all cases shall be increased to a minimum of 25% within a period of three years from the date of listing. Additionally, any units offered to sponsor or the manager or their related parties or their associates shall be excluded from the calculation of the offer size.

Further, REITs are now permitted to invest via a two-level structure through a holding company, subject to sufficient shareholding in the holding company and the underlying Special Purpose Vehicle ("SPV"). This substantially reduces costs of consolidation, and added capitalisation at the holding company level through the primary markets. Thus an analogy can be drawn between REITs and Companies under the Companies Act, 2013 ("CA, 13"), which similarly permits investments through two layers.

Notification of SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2016

SEBI has, vide its notification dated November 30, 2016 amended the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. The amendment mandates that reservation on competitive basis shall be in accordance with the conditions laid down in the Regulations provided that in the event of under – subscription in the employee reservation portion, the unsubscribed portion shall be allotted on a proportionate basis, for a value in excess of two lakhs rupees, subject to the total allotment to an employee not exceeding five lakhs rupees.

Amendment in Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000

RBI has, vide notification dated October 20, 2016, amended that any Foreign Venture Capital Investor ("FVCI") which has obtained registration under the Securities and Exchange Board of India (Foreign Venture Capital Investor) Regulations, 2000 ("FVCI Regulations") will not require any approval from RBI and can invest in Equity or equity linked instrument or debt instrument issued by an Indian company whose shares are not listed on a recognised stock exchange at the time of issue of the said securities / instruments and engaged in any of the sectors like Biotechnology, IT related to hardware and software development, Nanotechnology, Seed research and development, Research and development of new chemical entities in pharmaceutical sector, Dairy industry, Poultry industry, Production of bio-fuels, Hotel-cum-convention centres with seating capacity of more than three thousand, Infrastructure sector. Further it can also invest in equity or equity linked instrument or debt instrument issued by an Indian 'startup' irrespective of the sector in which the startup is engaged. Prior to this amendment, RBI approval was mandatorily required to be obtained by FVCI thus unnecessarily deferring and complicating the procedure. Such simplification has done away with the apprehension of the FVCI.

Circular of streamlining the process for Acquisition of shares pursuant to Tender – Offers made for Takeovers, Buy Back and Delisting of Securities

SEBI vide its circular dated December 9, 2016 has ruled that the transfer of shares of shareholders under the tender offers would be made directly to the account maintained by the clearing corporation. The clearing corporation will utilise the securities towards the settlement obligations under the offer and will directly credit the unaccepted tendered shares under such offer to shareholder's bank and demat accounts respectively. Such welcome measure shall reduce the systematic risk for investors and ease the process of implementation. This amended procedure shall be applicable to all the offers for which Public Announcement is made on or after January 2, 2017.

Notification on reviewing the sectoral caps and simplification of Foreign Direct Investment ("FDI") Policy

RBI vide its notification dated October 20, 2016 has done away with the Government approval and compliance with the sectoral conditions for the portfolio investments up to aggregate foreign investment level of 49% or sectoral cap, whichever is lower, provided such investment does not result in change in ownership leading to control of Indian entities by non – resident entities.

Additionally, foreign investment by way of swap of shares has been permitted provided the resident company in which the investment is made is engaged in an automatic route sector subject to the condition that irrespective of the amount, valuation of the shares involved in the swap arrangement will have to be made by a Merchant Banker registered with the SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.

Further, foreign investment in Limited Liability Partnership ("LLP") is permitted under the automatic route if the LLP is engaged in sector where 100% FDI is allowed and there are no attendant FDI linked performance conditionality to the sector.

RBI Simplifies Norms related to ECB

Prior to simplification, under the extant ECB guidelines, designated AD Category-I banks were authorized to approve requests from borrowers for changes in repayment schedule during the tenure of the ECB, i.e., prior to maturity, provided average maturity and all-in-cost are in conformity with applicable ceilings/ norms. To simplify the procedure relating to ECB, under the liberalized scheme, the powers have been delegated to designated AD Category-I banks to approve requests from borrowers for extension of matured but unpaid ECB, subject to the following conditions:

a. No additional cost is incurred;
b. Lender's consent is available; and
c. Reporting requirements are fulfilled.

Further, powers are also delegated to designated AD Category – I bank to approve cases of conversion of matured but unpaid ECB into equity subject to same conditions as set out above.

It should also be noted that if the ECB borrower concerned has availed credit facilities from the Indian banking system including overseas branches/subsidiaries, any extension of tenure / conversion of unpaid ECBs into equity (whether matured or not) shall be subject to applicable prudential guidelines issued by the Department of Banking Regulation of RBI, including guidelines on restructuring. Further, such conversion into equity shall also be subject to consent of other lenders, if any, to the same borrower or at least information regarding conversions shall be exchanged with other lenders of the borrower.

Government of India ("GoI") allowed 100% FDI in 'Other Financial Services'

Pursuant to Press Note dated October 25, 2016, GoI has decided to allow foreign investment up to 100% under the automatic route in 'Other Financial Services'. Other Financial Services will include activities which are regulated by any financial sector regulator viz. RBI, Securities and Exchange Board of India, Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority, National Housing Bank or any other financial sector regulator as may be notified by the GoI of India in this regard. Such foreign investment shall be subject to conditionalities, including minimum capitalization norms, as specified by the concerned Regulator/ Government Agency.

Salient features of the revised regulatory framework are as under:

a. In financial services, activities which are not regulated or partly regulated by any financial sector regulator or where there is lack of clarity regarding regulatory oversight, foreign investment will be allowed up to 100% under the Government approval route.
b. Foreign investment in an activity which is specifically regulated by a specific act, will be restricted to foreign investment levels/limits, if any, specified in that particular act.
c. Downstream investment by any entity engaged in 'Other Financial Services" will be subject to extant sectoral regulations and provisions of Principal Regulations.
d. Prior to the aforestated press note, 100% FDI was allowed under automatic route for only 18 specified Non Banking Financial Companies (NBFC) activities including merchant banking, under writing, portfolio management services, financial consultancy and stock broking and that too subject to adherence to certain conditions including fulfillment of minimum capitalization norms.

Indians Outside Can Buy Health, General Insurance in Forex

Pursuant to RBI's notification dated November 17, 2016, the following amendments in Foreign Exchange Management (insurance) Regulations, 2000 have been notified:

(i) All general/health insurance policies permitted by Insurance Regulatory and Development Authority of India ("IRDAI") are allowed to be placed in foreign exchange. No RBI permission is required for issuance/renewal of any insurance policy;
(ii) Payment of insurance premium in foreign currency by Indian Resident is no longer required irrespective of currency for settlement of claim;
(iii) Resident outside India may obtain general/health insurance policy on payment of insurance premium in foreign currency irrespective of currency for settlement of claim. However, if the premium is paid in INR, settlement of claim will be in INR;
(iv) Resident going abroad for employment purpose may also take health insurance policy on payment of premium in INR; and

Claims settlement under cashless international health insurance policies to hospitals providing treatment or through Third Party Administrator ("TPA") arrangements allowed.


Implementation of The Insolvency and Bankruptcy Code, 2016.

The Insolvency and Bankruptcy Code, 2016 ("Code") was passed by the Parliament on May 11, 2016 and was notified in the official gazette on May 28, 2016.

The objectives of the Code are as follows:

a) to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons;
b) to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues; and
c) to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

The Code extends to the whole of India; however, Part III of this Code does not apply to the state of Jammu and Kashmir. It applies only to the extent of insolvency, liquidation or bankruptcy.

Persons covered under the Code are as follows:

  • Companies incorporated under the CA, 2013 or under any previous company law;
  • Companies governed by any special act, to the extent the provisions are consistent with the Act;
  • Limited Liability Partnerships ("LLPs");
  • Any other body corporate incorporated under any act for the time being in force, as the Central Government may specify;
  • Partnership Firms; and
  • Individuals;

The Code has constituted an Insolvency and Bankruptcy Board of India ("IBBI") that seeks to consolidate and amend laws relating to reorganization as well as insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. The Board for Industrial and Financial Reconstruction ("BIFR") has become redundant; therefore, corporate insolvencies shall be dealt by the NCLT and proprietorship and partnership insolvencies by the Debt Recovery Tribunal ("DRT"). It envisages one law for bankruptcy and has repealed two laws and amended eleven in relation to the same. The Code covers companies, partnerships, limited liability partnerships and individuals. However, more can be included.

Under the Code, various institutions have been established for the smooth implementation of the Code:

  • The IBBI as mentioned above to oversee the entire process;
  • Insolvency Resolution Professionals to guide the insolvency process and agencies to regulate these professionals. The Model Bye-Laws and Governing Body of Insolvency Professional Agencies and in relation to the Insolvency Professional Agencies have been notified by the IBBI;
  • Information utilities which will collect, collate and disseminate financial information related to a debtor; and
  • Adjudicating Authorities (AA) as discussed below.

For adjudication, there are two authorities specified under the Code to exercise judicial control over the insolvency and liquidation process; firstly, for companies, LLPs and other limited entities the authority is the NCLT; secondly, for individuals and partnerships, the authority is the DRT and appeals lie before the Debt Recovery Appellate Tribunal. Their role is limited to ensuring due process rather than adjudicating on the merits of the insolvency resolution. The Supreme Court shall have appellate jurisdiction over NCLT and DRT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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