India: Foreign Investment Regime Overhauled | Draining The Swamp?

On 7 November 2017, the Reserve Bank of India (RBI) issued Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2017 (New FEMA 20) to replace the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2000 (Old FEMA 20) and the Foreign Exchange Management (Investments in Firms or Proprietary concern in India) Regulations, 2000 (FEMA 24). New FEMA 20 consolidates Old FEMA 20 and FEMA 24.

The New FEMA 20 eliminates several redundancies and clarifies a plethora of interpretational issues that plagued old regime.

Investment Instruments | Some New & Some Modified

  • Portfolio investments in listed companies by non-FPIs: A new route has been made available for foreign investments by any Non-Resident (NR) up to a 10% limit in listed companies. Primary subscription under this route does not require advance reporting or FC-GPR reporting.
  • Warrants: Only listed companies can issue warrants to NRs, as such warrants are required to be compliant with the Securities and Exchange Board of India (SEBI) regulations.
  • Cap of Dividend on preference shares: The dividend limit of 300 basis points over SBI PLR that applied to compulsorily convertible preference shares issued to NRs no longer applies.
  • FVCIs: FVCIs are now expressly permitted to invest in non-convertible instruments. The language under the previous regulations was ambiguous.

Sectors Changes

  • Private Security agencies: Sectoral cap for private security agencies has been reduced from 74% to 49% under the approval route.
  • Commodities spot exchanges: Sectoral cap of 49% under automatic route has been specified for investments in commodities spot exchanges. Guidelines for investments will be prescribed by the government in due course.

Changes involving Various Investment Routes

  • Renunciation of rights issue entitlement: Pursuant to a rights issue, NRs can now acquire capital instruments (other than share warrants) that are renounced by residents. Rights issues are permitted at the price: (a) determined by the company, in case of a listed company; and (b) at which instruments are offered to residents.
  • Transfers by NRIs: Transfer of capital instruments by a Non-Resident Indian (NRI) to an NR no longer requires RBI approval.
  • Reclassification of FPI holding: The total investment made by a SEBI registered foreign portfolio investor (FPI) in a listed company will be re-classified as FDI where it's holding exceeds 10% of the paid-up capital or 10% of the paid-up value in respect of each series of instruments. Such a reclassification is required to be reported by way of Form FC-GPR.
  • Mandatory divestments by FPIs, NRIs and OCIs: FPIs, NRIs or Overseas Citizens of India (OCIs) are required to mandatorily divest their holdings that exceed the prescribed limits. Provisions and timelines for such divestment are yet to be notified.
  • Non-repatriable investments: Non-repatriable (Non-Repat) investments are treated at par with domestic investments for almost all purposes.
  • Investments in firms and proprietary concerns: The regime governing investments in firms and proprietary concerns (FEMA 24) has been consolidated into the New FEMA 20.

Other Key Changes Impacting M&A Transactions

  • Delay in reporting and title to securities: Delay in complying with reporting requirements (Form FC GPR, Form FC TRS and other prescribed reportings) will attract late fees (to be decided by RBI). However, such delays will not affect acquirer's title to securities.
  • Calculating downstream investments: Due to certain drafting ambiguities, investments made by Foreign Owned and Controlled Indian Companies (FOCCs) in any form of capital that is not mandatorily convertible into equity shares (vis. redeemable preference shares, etc.) may be counted towards downstream investments. Further, ambiguity regarding FOCCs' ability to invest in non-convertible instruments persists.
  • Pricing and reporting of downstream investments: Applicability of pricing guidelines and reporting of transactions involving FOCCs are summarised below:


SELLER

BUYER

PRICING GUIDELINES

REPORTING

FOCC

Resident

No reporting

Resident

FOCC

Form DI

FOCC

NR

Form FC-TRS

NR

FOCC

Form FC-TRS

FOCC

FOCC

X

No reporting

 

  • Deferred consideration, escrow, indemnity in transfers: Operational matters involving deferred consideration, post-closing escrows and indemnity have been clarified:


Mechanics

period

Deferred consideration (Form FC-TRS to be filed for every tranche of consideration)

18 months from transfer
agreement date

Escrow arrangement

Indemnity obligations

18 months from payment of
the full consideration

 

Note: In all cases: (a) an amount not exceeding 25% of the total consideration can be adjusted through any of the above methods; and (b) the total consideration finally paid (post the adjustment) should comply with applicable pricing guidelines.

  • Pricing ambiguity for listed securities: An ambiguity has arisen in context of transfer of capital instruments of a listed company by a resident to a NR as an off-market transaction. Under the previous regulations, floor price for such transfers was determined on the same principle applicable for preferential allotment of listed companies, with 'relevant date' being the date of transfer of shares. Clarity on 'relevant date' is absent for such transfer from a resident to a NR, and can now be interpreted to be either the 'date of execution of definitive agreement' or the 'date of transfer of capital instrument'.
  • Pledge of unlisted instruments by NRs to NBFCs: NRs are now permitted to pledge unlisted shares in favour of NBFCs without a specific RBI approval (after the authorised dealer is satisfied of the bona fides of the credit facility).
  • Valuation in LLP transactions: The fair price of capital contribution/ profit share of LLPs (in transfers between residents and NRs) is required to be determined by a chartered accountant, practicing cost accountant or an approved valuer from a panel maintained by the central government as per any valuation norm which is internationally accepted/ adopted as market practice.

Changes in Procedure

  • Direct offshore repatriation by FVCIs: FVCIs are now permitted to directly repatriate sale proceeds offshore.
  • Timeframe for allotment: In line with the Companies Act, 2013, the timeframe for allotting instruments has been reduced to 60 days from 180 days.
  • FC-TRS for FPIs and FVCIs: Transactions involving sale of securities by FPIs and FVCIs to residents are also required to be reported by way of FC-TRS.
  • FC-TRS for on-market transactions: NR has the onus to file FC-TRS for transfers on the floor of the stock exchange, which was previously responsibility of the investee company.
  • Reporting requirements for downstream investments: Downstream investments are required to be reported by way of Form DI within 30 days of investment, irrespective of whether securities have been allotted. Format of form DI has not yet been prescribed.
  • Reporting requirements for LLP transfers: Transfer of capital contribution/ profit share of LLPs are required to be reported by way of Form LLP(II). It is not clear which party is obligated to make this filing.
  • Reporting convertible notes: Start-ups issuing convertible notes are required to file Form CN within 30 days of issue. Residents buying or selling convertible notes are also required to file Form CN within 30 days of transfer. Format of Form CN has not yet been prescribed.

Comment

The New FEMA 20 is a long overdue and welcome attempt to provide a clearer and more business friendly regulatory framework. However, interpretational ambiguities exist in certain areas. We expect further clarifications on these issues in the days to come.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions