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7 October 2024

Corporate & Commercial Monthly Newsletter | October 2024

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Securities Exchange Board of India ("SEBI") vide a notification dated August 5, 2024, notified SEBI (Alternative Investment Funds) (Fourth Amendment) Regulations, 2024...
India Corporate/Commercial Law

Securities Exchange Board of India (Alternative Investment Funds) (Fourth Amendment) Regulations, 2024

  • Securities Exchange Board of India ("SEBI") vide a notification dated August 5, 2024, notified SEBI (Alternative Investment Funds) (Fourth Amendment) Regulations, 2024 (the "Amendment Regulations"), whereby it amended SEBI (Alternative Investment Funds) Regulations, 2012 (the "Principal Regulations"). The Amendment Regulations came into effect on August 6, 2024. Pursuant to the Amendment Regulations, SEBI has also issued Guidelines for Borrowing by Category I and II Alternative Investment Funds ("Category I and II AIFs") and Maximum Permissible Limit for Extension of Tenure by Large Value Fund ("LVFs") on August 19, 2024 ("SEBI Guidelines"), in line with the Amendment Regulations. Following changes have been made by the Amendment Regulations to the Principal Regulations:
    • The maximum extension of tenure for LVFs for accredited investors has been capped at 5 (five) years, subject to approval from two-thirds of the unit holders by value of their investment in the LVF for accredited investors. Further, the extension in tenure of any existing LVF scheme shall be subject to such conditions as may be specified by SEBI from time to time.

      Prior to the Amendment Regulations, Provision to Regulation 13(5) of Principal Regulations stated that LVFs for accredited investors may be permitted to extend its tenure beyond 2 (two) years, subject to terms of the contribution agreement, other fund documents, and such conditions specified by SEBI.
    • Category I and II AIFs shall not engage in any leverage for the purpose of making investments or otherwise and shall only borrow funds to meet temporary funding and day-to day operational requirements, for not more than thirty days, for not more than four times a year and not more than 10% of the investable funds and subject to such conditions as prescribed by SEBI.
    • Category I and Category II AIFs are permitted to create encumbrances on the equity of investee companies which is in the business of development, operation or management of projects in any of the infrastructure subsectors listed in the Harmonised Master List of Infrastructure issued by the Central Government, but only for the purpose of the investee company borrowing and subject to conditions specified by SEBI.

In order to specify the conditions as stipulated in the Amendment Regulations and to clarify the provisions of Amendment Regulations, SEBI Guidelines states the following:

  • Maximum permissible limit for extension of tenure by LVFs Existing LVF schemes which have not disclosed definite period of extension in their tenure in the private placement memorandum or whose period of extension in tenure is beyond 5 (five) years as permitted under Amendment Regulations, such LVFs must align the per of extension in tenure with the modalities laid down in Regulation 13(5) of Principal Regulations, on or before November 18, 2024. Such LVF schemes shall update their revised period of extension in tenure in the quarterly report submitted on the SEBI intermediary portal for the quarter ending December 31, 2024.

    While realigning the period of extension in tenure, LVF schemes shall have the flexibility to revise their original tenure subject to the consent of all the investors of the scheme. LVF schemes shall submit an undertaking to SEBI on or before November 18, 2024, stating that consent of all the investors of the scheme has been obtained for revising the original tenure.
  • Guidelines for borrowing by Category I and Category II AIFs

    In order to facilitate ease of doing business and provide operational flexibility, SEBI has allowed Category I and II AIFs to borrow funds for meeting temporary shortfall in the amount called from investors for making investment in the investee company ("Drawdown Amount"), subject to the following conditions:
    • The intention to borrow funds to meet the shortfall in the Drawdown Amount shall be disclosed in the private placement memorandum of the scheme:
    • such borrowings shall be done only if there is an emergency and as a last recourse, when the investment opportunity is imminent to be closed and the drawdown amount is not received from the investor, despite the best efforts by manager to obtain the drawdown amount from the delaying investors;
    • The amount borrowed shall not exceed 20% (twenty percent) of the investment to be made in investee entity, or 10% (ten percent) of the investible funds of the AIF scheme, or commitment pending from the investors other then the investors who has failed to provide drawdown amount, which ever lower;
    • The cost of borrowing shall be charged to the investors who have failed to provide the drawdown amounts for investment;
    • The flexibility of borrowing to meet shortfall in drawdown amount shall not be used as a means to provide different drawdown timelines to investors;
    • The manager shall on a periodic basis and as per the terms of the agreement, inform the investors of the details of the amount borrowed, terms of borrowing and the repayment of the amount so borrowed.

The cooling period between two borrowings made under the amended Regulation 16(1)(c) and 17(1)(c) of the Principal Regulations shall be thirty days and shall be calculated from the date of repayment of previous borrowing.

  • Further, an obligation have been put on the trustee/sponsor of the Category I and Category II AIFs, that they shall ensure that the Compliance Test Report prepared by the manager in terms of provisions of Master Circular for AIFs, includes compliances provided under Amendment Regulations and SEBI Guidelines.

Conclusion

With the Amendment Regulations, SEBI has provided operational flexibility to category I and category II AIFs with regulatory supervision, which shall augment liquidity by allowing AIFs to meet the investment timelines. SEBI Guidelines have further clarified the purpose of which the borrowing can be done category I and category II AIFs along with some mandatory conditions.

Amendment to FEMA (Non-Debt Instruments) Rules, 2019

Department of Economic Affairs, Ministry of Finance vide its notification dated August 16, 2024, notified the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 ("NDI Amendment Rules"), amending the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules"), which governs the foreign investment in India. Summary of the key changes introduced through the NDI Amendment Rules

  • Changes in Definition of "Control" and "Startup"
    1. The NDI Amendment Rules have aligned the definition of 'Control' with the definition of control under Companies Act, 2013 ("CA 2013"). Under the Companies Act and Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, 'control' has been defined to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
    2. The definition of a 'startup company' has been amended to align it with notification issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry ("DPIIT") in 2019.
  • Government Approval for Transfer of Equity Instruments of an Indian Company by or to a Person Resident Outside India NDI Amendment Rules amended the Rule 9 (1)(i) of NDI Rules to state that 'prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable'.

    However, previously it stated that in case of transfer equity instruments of an Indian Company by or to a person resident outside India, 'prior government approval shall be obtained for any transfer in case the company is engaged in a sector which requires government approval'.

    From the amended language, it could be inferred that even though a company is not engaged in a sector which requires government approval, it would require the government approval if under extent foreign exchange regulations such investment requires government approval.
  • Swap of Equity Instruments and Equity Capital

    The NDI Amendment Rules permit the transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India by way of swap of:
    • equity instruments; or
    • equity capital of a foreign company, in compliance with the rules and regulations prescribed by the central government and the Reserve Bank of India.

Such swaps of equity instruments are also permitted in cases where government approval is applicable provided such prior government approval is obtained.

Previously, the NDI Rules did not permit transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India for a consideration by way of swap of shares between an Indian company and a foreign entity.

  • Clarification on Downstream Investments

    The NDI Amendment Rules clarified that investment made by an Indian entity which is owned and controlled by an Overseas Citizen of India including a company, a trust and a partnership firm incorporated outside India and owned and controlled by an Overseas Citizen of India, on a nonrepatriation basis, shall not be considered for calculation of indirect foreign investment.

    Previously, only investments made by Indian entities owned and controlled by Non-Resident Indians (NRIs) on a nonrepatriation basis were excluded from the calculation of indirect foreign investment.
  • Government Approval for Foreign Portfolio Investment

    The NDI Amendment Rules prescribe that the aggregate foreign portfolio investment ("FPI") up to the sectoral or statutory cap will not require government approval or compliance with sectoral conditions, if such investment does not result in transfer of ownership and/or control of the resident Indian company from resident Indian citizens to person resident outside India.

    Previously, NDI Rules mandated government approval if the total foreign portfolio investment exceeded either 49% of the paid-up capital on a fully diluted basis or the applicable sectoral or statutory cap, whichever was lower, and if such investment resulted in a change of ownership and/or control of the Indian company from resident Indian citizens to nonresidents.
  • Facilitating FDI in the White Label ATM Operations Sector White Label ATMs ("WLA") are ATMs that are set up, owned and operated by non-banking companies in India, and are authorised under the Payment and Settlement Systems Act, 2007 (PSS Act) by the RBI.

    NDI Amendment Rules inserted a new entry F.11 under the table in Schedule I of the NDI Rules in relation to foreign direct investment in White Label ATM Operations' sector. It provides that foreign direct investment up to 100% under the automatic route is permitted in such sector, subject to specified conditions.

Conclusion

The changes made by NDI Amendment Regulations in NDI Rules will have positive impact on the foreign investment in India. The share swaps mechanism as consideration will enhance crossborder investment flows. The clarification regarding NRI and OCI investments on a non-repatriation basis will provide greater certainty and consistency, thus supporting more robust investment activity from these groups

White label ATMS | Regulatory and sectoral developments in the past decade and liberalisation of foreign investment

[This is Part 1 of the article series on the regulatory developments pertaining to the business of White Label ATM operations in India]

On August 16, 2024, the Ministry of Finance, notified amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) vide the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (Amendment Rules). The Amendment Rules have now inserted a specific entry for 100% foreign investments under automatic route in white label Automated Teller Machines (ATM) operations. This aligns the sectoral investment-related provisions with the corresponding entries under the Consolidated FDI Policy, 2020, notified by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry (FDI Policy).

The DPIIT (erstwhile DIPP), in 2015, reviewed the extant FDI policy and permitted 100% foreign investments under automatic route for WLA operations, thereby doing away with the requirement to obtain prior authorisation as stipulated under the approval route. The Amendment Rules have now formalised and enacted as law this position, and is a welcome move as it reiterates and confirms the position of allowing private non-bank entities to associate with foreign investors, thereby intending to increase the number of WLA Operators and aiming to fulfil RBI's objective of deploying ATMs in Tier III – VI centres/ cities of the country.

To extend banking services and bolster access of ATMs to unbanked or underbanked areas of the country, the Reserve Bank of India (RBI), in 2012, permitted non-bank private entities, incorporated under the Companies Act, 1956 (now, Companies Act, 2013), to establish, own, and operate their own brand of ATMs and provide banking services to customers (2012 Guidelines). This could be done post obtaining necessary authorisations (as a payment system operator) from the RBI, in compliance with the provisions of the Payment and Settlement Systems Act, 2007. Such ATMs are known as White Label ATMs (WLAs) and non-bank entities who set-up and provide such ATM services are known as WLA Operators. Currently, WLAs are equipped to offer a range of banking services, through debit/credit/prepaid cards by banks, which inter alia include, dispensing cash, providing account information, permitting cash deposits, regular bill payments, generating mini/ short account statements, enabling change of the personal identification number (PIN), and making requests for chequebook.

To facilitate WLA Operators to efficiently set-up and operate ATM services in semi-urban and rural areas, and further its objective of achieving financial inclusion throughout the country, RBI has periodically granted different privileges to WLA Operators, viz:

a) permitting WLAs to accept international credit/debit/prepaid cards, subject to technical connectivity with their respective card network operators (directly or through their sponsor banks);

b) permitting the facility of dynamic currency conversion for use of international cards at WLAs, subject to the WLA Operators liaising with their authorised dealer banks for currency conversion rates;

c) allowing the WLA Operators to tie-up with commercial banks (other than their sponsor banks) for cash supply to their WLAs, thereby enabling delinking of cash supply from that of sponsor bank arrangements;

d) authorising direct purchase of wholesale cash (above a threshold of 1 lakh pieces) from RBI's issue offices and currency chests;

e) permitting the WLA Operators to source cash from any scheduled bank, including co-operative banks and regional rural banks; and

f) offering bill payment and interoperable cash deposit services at WLAs, subject to technical feasibility and necessary certifications obtained from the National Payments Corporation of India (NPCI).

Subsequently, in another development on the same line, RBI has permitted WLA Operators to display advertisements pertaining to non-financial products / services within their WLA premises, including on the WLA screen (except the main signboard), thereby enabling revenue generation through advertisements in addition to the inter-change fee earned by the WLA Operators. RBI has additionally extended the benefit of 'on-us' transactions to WLAs by allowing banks to issue co-branded ATM cards in partnership with such authorised WLA Operators. To further give impetus to the increased WLA deployment and encourage more private players to enter the WLA industry, from 2019 onwards, the RBI has extended on-tap authorisation for the applications from prospective WLA Operators, thereby streamlining the process of establishment and operation of WLAs. Post this notification, the authorisations pertaining to applications by entities intending to operate WLAs will be based on merits of their proposal and RBI's assessment of potential for additional entities in the segment.

Applicant entities who intend to become WLA Operators are required to specify their proposed WLA activity under their charter documents i.e., memorandum of association, and have a minimum net worth of INR 100 Crore (USD 12 Million approx.), as per the latest audited balance sheet, to be maintained at all times. Moreover, the Amendment Rules as well as the FDI Policy require that if the applicant entity is engaged in any 'other financial services', then any foreign investments made into such applicant entities would be required to additionally comply with the minimum capitalisation norms (if any) stipulated for foreign investments in 'other financial services'. Additionally, the application submitted by the applicant entity should also specify the scheme selected by them (from among the three schemes stipulated by the RBI under the 2012 Guidelines, basis the quantum of ATMs to be opened by WLA Operators) and the quantity of WLAs sought to be installed on a year-on-year basis, in accordance with their chosen scheme. It is important to note that, once the application is made and authorisation is sought, switchover of schemes is not permitted, and the authorisation sought cannot be assigned or transferred without the prior written approval from RBI.

Currently, there are only four WLA Operators in India, being Tata Communications Payment Solutions Limited, Hitachi Payment Services Private Limited, India1 Payments Limited and Vakrangee Limited. It is hoped that the opening up of the sector and incentives offered over the course of past years should increase par participation and increase penetration and access to banking services for a greater section of the Indian population.

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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