Semi-Annual Finance And Insolvency Law Compendium 2024

Introduction

This compendium consolidates all the key developments pertaining to the finance and insolvency laws in India which were circulated as a part of the JSA Prisms and Newsletters during the calendar period from January 2024 till June 2024.

Alternative Investment Funds

The ever-increasing regulatory oversight on Alternative Investment Funds

Increased regulatory oversight on Alternative Investment Funds ("AIFs") has been in the news in the recent past. In addition to direct regulatory oversight on the AIFs itself, AIFs are also indirectly impacted by various other statutory and regulatory restrictions or conditions that are applicable to the underlying legal form of the AIF, the investors in the AIF or the investment portfolio of the AIFs.

Some of the recent statutory and regulatory amendments affecting AIFs are discussed below.

1. Significant beneficial ownership and AIFs

Under the Securities and Exchange Board of India ("SEBI") (AIFs) Regulations, 2012 ("AIF Regulations"), an AIF can be established or incorporated in the form of a trust or a company or a Limited Liability Partnership ("LLP") or a body corporate.

After trusts, LLPs have been the most preferred legal form for an AIF, since LLPs are more beneficial from a tax perspective and with lesser compliance requirements than a company.

However, in the recent past, LLPs are also being subjected to additional compliance requirements.

One recent compliance/disclosure requirement imposed on the LLPs is pursuant to the LLP (Third Amendment) Rules, 2023 and the LLP (Significant Beneficial Owners ("SBOs")) Rules, 2023 ("SBO Rules"). As per the SBO Rules, an LLP is required to take necessary steps to find out if any individual qualifies as a 'SBO' in relation to the LLP. If such SBO has been identified, then the LLP must cause such individual to make a declaration in Form No. LLP BEN-1.

As per one of the exemptions available under the SBO Rules, the aforesaid requirements will not apply to the extent the contribution in the LLP is held by an investment vehicle registered with the SEBI, such as an AIF. Thus, if an AIF is a partner in the LLP, the SBO Rules will not apply in respect of such AIF partner.

However, where the AIF has itself been set up as an LLP, then the SBO Rules will apply in relation to such AIF.

Accordingly,

1. an AIF (set up as an LLP) is required to issue a notice to a non- individual partner in Form No. LLP BEN-4, seeking information in accordance with sub-section (5) of Section 90 of the Companies Act, 2013 ("CA 2013"), if such nonindividual partner holds atleast 10% of such AIF's:
   1. contribution; or
   2. voting rights; or
   3. right to receive or participate in the distributable profits or any other distribution payable in a financial year;
2. every individual who is a SBO in the AIF, is required to file a declaration in Form No. LLP BEN-1 with the AIF within 90 (ninety) days from the date of commencement of the SBO Rules (i.e., November 9, 2023);
3. the SBO Rules define a "SBO" as an individual who acting alone or together or through one or more persons or trust, possesses one or more of the following rights or entitlements in the LLP:
   1. indirectly or together with any direct holdings, not less than 10% of the contribution;
   2. indirectly or together with any direct holdings, not less than 10% of voting rights in respect of the management or policy decisions in such LLP;
   3. right to receive or participate in not less than 10% of the total distributable profits, or any other distribution, in a financial year through indirect holdings alone or together with any direct holdings; and
   4. right to exercise or actually exercises, significant influence or control, in any manner other than through directholdings alone;
      
      As per the explanation, if an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii), (iii) or (iv) above, he will not be considered an SBO. The SBO Rules further define what would be considered as holding any right or entitlement 'directly' and what would be considered as holding any right or entitlement 'indirectly'.
      
      As per the SBO Rules, if an individual (acting alone or together or through one or more persons or trust) is entitled to exercise or actually exercises, significant influence or control, in any manner other than through direct holdings alone, then such individual will be considered to be an SBO.
      
      The term "significant influence" has been defined to mean "the power to participate, directly or indirectly, in the financial and operating policy decisions of the LLP but is not control or joint control of those policies."
4. the SBO Rules mandate filing a declaration in Form No. LLP BEN-1 for individuals who become SBOs or change ownership. The AIF must also file a return in Form No. LLP BEN-2 within 30 (thirty) days of receipt of declaration in Form No. LLP BEN-1, along with prescribed fees. Additionally, the AIF must maintain a register of significant beneficial owners in Form No. LLP BEN-3, open for inspection during business hours;
   
   Until now, it was not common for information of 1 (one) investor to be made accessible to other investors of the AIF.
   
   Further, apart from the sponsors and managers of AIFs, the investors of the AIFs also undergo 'know your customer' verification. Given that AIFs are already regulated by SEBI, it is unclear whether applying the SBO Rules to AIFs was needed.

2. Evergreening and AIFs

The Reserve Bank of India (",b>RBI"), in circular dated December 19, 2023, seeks to restrict evergreening of debt by banks/NBFCs through investments in AIFs. While the intent behind this circular is well received, the implications seem far reaching;

3. Dematerialisation of units issued by AIFs

1. in October 2018, dematerialisation of shares of unlisted public companies was mandated. In October 2023, dematerialisation of shares of private companies (that are not small companies) has also been mandated. SEBI, in its consultation paper dated February 3, 2023, proposed dematerialisation of units issued by the AIF. The consultation paper did acknowledge the concerns raised by the Alternative Investment Policy Advisory Committee in its meeting held on October 11, 2022. While in-principle agreeing with the proposal of dematerialisation of AIF units, the committee also raised certain concerns such as (i) administrative hassle/ burden for foreign investors to open demat account; and (ii) transferability of AIF units without the knowledge or control of the managers of AIFs;
2. the AIF Regulations have been amended and notified on June 15, 2023, to include Regulation 10(aa) which requires AIFs to issue units in dematerialised form subject to the conditions specified by SEBI from time to time;
3. this was followed by SEBI circular dated June 21, 2023, which stipulated the dates for dematerialisation of units already issued or to be issued;
4. further, recognising the possibility of unauthorised transfer of dematerialised units, SEBI, in its circular dated June 21, 2023, has clarified that the terms of transfer of AIF units held by an investor will continue to be governed by the terms of fund documents. However, the transfer restrictions under the fund documents may not be adequate, and the managers of AIFs may consider putting in place adequate mechanisms that restrict unauthorised transfer of units; and
5. a subsequent SEBI circular dated December 11, 2023, specifies process and stipulates timelines to be followed for crediting the existing units or new units that are to be issued, in demat form, in cases where investors are yet to provide their demat account details to AIFs and also in cases where investors have provided their demat account details to AIFs. The circular inter alia provides as under:
   1. units already issued by schemes of AIFs to existing investors who have not provided their demat account details, are required to be credited to a separate demat account named "Aggregate Escrow Demat Account". This account is permitted for the sole purpose of holding demat units of AIFs on behalf of investors. New units to be issued in demat form must be allotted to such investors and credited to the Aggregate Escrow Demat Account. As and when such investors provide their demat account details to the AIF, their units held in Aggregate Escrow Demat Account should be transferred to the respective investors' demat accounts within 5 (five) working days. No transfer of units of AIFs from/within Aggregate Escrow Demat Account will be allowed, except as above;
   2. the last date for completion of credit of demat units to (i) demat accounts of investors who have provided demat account details, and (ii) Aggregate Escrow Demat Account, for those who have not provided demat account details is January 31, 2024 for schemes with corpus ≥ INR 500 crore (Indian Rupees five hundred crore) (as on October 31, 2023) and May 10, 2024 for schemes with corpus < INR 500 crore (Indian Rupees five hundred crore) (as on October 31, 2023);
   3. units of AIFs held in the Aggregate Escrow Demat Account can be redeemed. The proceeds can be distributed to respective investors' bank accounts with full audit trail of such transaction;
   4. the AIF industry and depositories are required to adopt implementation standards formulated for compliance with the circular, by the recently set up Standard Setting Forum for AIFs ("SFA"), along with the 2 (two) depositories jointly, in consultation with SEBI. Such standards will include formats for information to be maintained by managers of AIFs with respect to holdings and transactions in the Aggregate Escrow Demat Account and reporting thereof to depositories and custodians. In this regard, Central Depository Services (India) Limited and the National Securities Depository Limited have already issued instructions in relation to opening of the Aggregate Escrow Demat Account in the month of December 2023; and
   5. managers of AIFs are required to adhere to such implementation standards. Such standards are required to be published on websites of the depositories and the industry associations which are part of the SFA, i.e., Indian Venture and Alternate Capital Association (IVCA), PEVC CFO Association and Trustee Association of India, within 45 (forty-five) days of issuance of the aforesaid circular.
6. as per the aforementioned circulars, all existing and new investments in AIFs must be held in dematerialised form.
   
   While demat of securities and units may not be a cumbersome process, opening of demat accounts by investors, especially by foreign investors or non-resident Indians can be time-consuming.
   
   The process/implementation standards issued from time to time with respect to the Aggregate Escrow Demat Account and related matters should provide some relief and direction to the AIF industry.

4. Dematerialisation of investments held by AIFs

In its meeting held on November 25, 2023, SEBI required AIFs to hold their investments in dematerialised form. SEBI has inter alia approved the following amendments to be made to the SEBI (AIFs) Regulations, 2012 (the amendments are still to be made):

1. any fresh investment made by an AIF after September 2024 must be held in dematerialised form;
2. the existing investments made by AIFs made prior to September 2024 have been exempted from the aforesaid requirement, except in the following cases:
   1. where the investee company has been mandated under applicable law to facilitate dematerialisation of its securities;
   2. given that all private companies (that are not small companies as per the audited financial statements of the period ended March 31, 2023) are also required to dematerialise their securities by September 2024, most of the existing investments made by the AIFs are likely to not benefit from this exemption; and
   3. where the AIF, on its own, or along with other SEBI registered intermediaries/entities which are mandated to hold their investment in dematerialised form, has control in the investee company.
3. the exemption will also apply to:
   1. liquidation schemes of AIFs;
   2. schemes of an AIF whose tenure (not including permissible extension of tenure) ends within 1 (one) year from the date of this requirement is notified; and
   3. schemes of an AIF which are in extended tenure as on the date this requirement is notified;

5. Appointment of custodian

Previously, only Category I and II AIFs with a corpus of more than INR 500 crore (Indian Rupees five hundred crore) and Category III AIFs were required to appoint a custodian. However, in its meeting held on November 25, 2023, SEBI has mandated that all AIFs must appoint a custodian. In this regard, SEBI has permitted an associate of manager or sponsor of the AIF to act as a custodian, subject to conditions that are similar to those prescribed under the SEBI (Mutual Funds) Regulations, 1996 in relation to appointment of a related party of sponsor of a mutual fund as its custodian.

Conclusion

Some of these measures are aimed at digitisation and strengthening investor protection, which are welcome. However, it is hoped that such measures do not add to the ever-increasing operational costs of the AIFs, which ultimately get passed on to the investors.

Further, there is an urgent need to revisit the circular issued on December 19, 2023, in connection with evergreening as it has several unintended consequences and imposes an onerous compliance burden on fund managers.

Holding investments in dematerialised form and appointment of custodian

The SEBI, vide notification dated January 5, 2024, and circular dated January 12, 2024, has introduced changes aimed at refining the regulatory framework governing AIFs. Some of the key provisions are as follows:

1. the SEBI (AIF) Regulations, 2012 have been amended to provide that AIFs must hold their investments in dematerialised form. However, this does not apply to:
   1. investments by AIFs in such type of instruments which are not eligible for dematerialisation; and
   2. investments held by a liquidation scheme of the AIFs that are not available in the dematerialised form;
      
      In addition to the above, SEBI has further specified that investments made by an AIF on or after October 1, 2024, must be held in dematerialised form. The investments made prior to October 1, 2024, are exempted from the requirement of being held in dematerialised form, except where: (a) the investee company of the AIF has been mandated under applicable law to facilitate dematerialisation of its securities; and (b) the AIF, on its own, or along with other SEBI registered intermediaries/entities which are mandated to hold their investments in dematerialised form, exercises control over the investee company. These investments must be held in dematerialised form on or before January 31, 2025.
2. the SEBI (AIF) Regulations, 2012 have been amended to provide that the sponsor or manager of the AIF must appoint a custodian registered with SEBI for safekeeping of the securities of the AIF. The custodian for a scheme of an AIF must be appointed prior to the date of first investment of the scheme. Existing schemes of Category I and II AIFs having corpus of less than or equal to INR 500 crore (Indian rupee five hundred crore) and holding at least one investment as on January 12, 2024, must appoint custodian on or before January 31, 2025. The custodian which is an associate of the sponsor or manager can act as a custodian for that AIF only when all the following conditions are met on or before January 31, 2025:
   1. the sponsor or manager has a net worth of at least INR 20,000 crore (Indian rupees twenty thousand crore) at all points of time;
   2. 50% or more of the directors of the custodian do not represent the interest of the sponsor or manager or their associates;
   3. the custodian and the sponsor or manager of the AIF are not subsidiaries of each other and do not have common directors; and
   4. the custodian and the manager of the AIF have signed an undertaking that they will act independently of each other in their dealings of the schemes of the AIF.

Foreign investment in AIFs

SEBI, vide circular dated January 11, 2024, has revised the foreign investment provisions in the Master Circular for AIFs to incorporate that the manager of an AIF must ensure, at the time of on-boarding investors, that the investor, or its beneficial owner is not included in the sanctions list and is not a resident in the country identified in the public statement of Financial Action Task Force as:

1. a jurisdiction having a strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply; or
2. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
   
   Further, in case an investor, who has already been on-boarded to scheme of an AIF, does not meet the above condition, the manager of the AIF must not drawdown any further capital contribution from such investor for making investment, until the investor meets the said condition.

Investments in AIFs by regulated entities

To address the concerns relating to investments by Regulated Entities (",b>REs") and to ensure uniformity in implementation among REs, RBI, vide circular dated March 27, 2024, has advised the following:

1. downstream investments referred to in paragraph 2(i) of the circular dated December 19, 2023 ("Circular"), will exclude investments in equity shares of the debtor company of the RE, but will include all other investments, including investment in hybrid instruments;
2. provisioning in terms of paragraph 2(iii) of the Circular will be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme;
3. paragraph 3 of the Circular applies only to AIFs without downstream investment in debtor companies of the RE. If the RE has investment in subordinated units of an AIF scheme with downstream exposure, it must comply with paragraph 2 of the Circular. Further, the proposed deduction from capital in the Circular will be equally distributed across Tier-1 and Tier-2 capital, and the reference to investment in subordinated units of the AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units; and
4. investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the Circular.

AIF Regulations amended to ensure investor protection

SEBI, vide notification dated April 25, 2024, has issued the SEBI (AIFs) (Second Amendment) Regulations, 2024, amending the AIF Regulations. The key provisions are as follows:

1. Category I AIFs and Category II AIFs can create encumbrance on equity of investee company, which is in the business of development, operation or management of projects in any of the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Central Government, only for the purpose of borrowing by such investee company and subject to the prescribed conditions by SEBI;
2. AIFs, manager of the AIFs and key management personnel of the manager must exercise specific due diligence, with respect to their investors and investments, to prevent facilitation of circumvention of laws specified by SEBI;
3. the liquidation period for a scheme of an AIF that has expired or is expiring within 3 (three) months, can be granted an additional liquidation period, subject to certain conditions as specified by SEBI;
4. AIFs cannot launch any new liquidation scheme after the notification of these amendments;
5. provisions relating to the dissolution period are inserted. The term 'dissolution period' is defined to mean the period following the expiry of the liquidation period of the scheme for the purpose of liquidating the unliquidated investments of the scheme of the AIF. The scheme entering into a dissolution period has to file an information memorandum with SEBI through a merchant banker. The dissolution period of a scheme of an AIF must not be more than the original tenure of the scheme and must not be extended in any manner upon expiry of the dissolution period. The scheme of the AIF must not accept any fresh commitment from any investor and must not make any new investment during the dissolution period; and
6. the unliquidated investments of the AIF scheme that are not sold by the expiry of the dissolution period will be mandatorily distributed in-specie to the investors, as specified by SEBI.

Changes in terms of private placement memorandum of AIFs

SEBI, vide circular dated April 29, 2024, has eased the requirement of intimation of changes in the terms of Private Placement Memorandum ("PPM") of AIFs through merchant bankers. Pursuant to the SEBI Master Circular for AIFs dated July 31, 2023, intimation with respect to any change in the terms of PPM of AIF was required to be submitted to SEBI through a merchant banker along with a due diligence certificate from the merchant banker. Now, certain changes in the terms of PPM, such as, changes made in the write-up on market opportunity/ Indian economy/ industry outlook, track record of investment manager, risk factors, legal regulatory and tax consideration, do not need to be submitted through a merchant banker and can be filed directly with SEBI. Similarly, changes with respect to:

1. information such as contact details (address, phone number etc.) of AIF, sponsor, manager, trustee or custodian; and
2. auditor, registrar and share transfer agents, legal advisor or tax advisor, size of the fund/scheme, information related to Affiliates, commitment period, key investment team, key management personnel (except if the changes are due to change in control of manager and sponsor), advisory boards, expenses, disclosures, and other factual and routine updates need not be filed through a merchant banker.

Further, large value funds for accredited investors are exempted from the requirement of intimating any changes in the terms of PPM through a merchant banker. They can directly file any changes in the terms of PPM with SEBI, along with a duly signed and stamped undertaking by chief executive officer of the manager of the AIF (or such other person with equivalent role/ position) and compliance officer of the manager of the AIF, in a pre-specified format.

Revised pricing methodology for privately placed Infrastructure Investment Trusts

SEBI, vide circular dated February 8, 2024 , has revised the pricing methodology for institutional placement by privately placed Infrastructure Investment Trusts ("InvITs"). The floor price for institutional placement for privately placed InvITs will be the net asset value per unit of such InvIT. The institutional placement by public InvIT will continue to be at a price not less than the average of the weekly high and low of the closing prices of the units of the same class quoted on the stock exchange during the 2 (two) weeks preceding the relevant date.

New guidelines for small and medium Real Estate Investment Trusts

SEBI, vide notification dated March 8, 2024, has introduced the SEBI (Real Estate Investment Trusts ("REITs")) (Amendment) Regulations, 2024 ("Amended REIT Regulations"), outlining provisions for Small and Medium ("SM") REITs. The key provisions are as follows:

1. Amended definition of REIT: The definition of 'REIT' is substituted to mean 'a person that pools INR 50 crores (Indian rupees fifty crores) or more for the purpose of issuing units to at least 200 (two hundred) investors so as to acquire and manage real estate asset(s) or property(ies), that would entitle such investors to receive the income generated therefrom without giving them the dayto-day control over the management and operation of such real estate asset(s) or property(ies)';
   
   An explanation is added to the definition of 'REIT' stating that a REIT will include a SM REIT. Further, it is clarified that, any company which acquires and manages real estate asset(s) or property(ies) and offers or issues securities to the investors, will not be construed as a REIT;
2. Eligibility criteria for formation of SM REITs: The Amended REIT Regulations prescribe certain eligibility criteria for the formation of SM REITs. Some of the key eligibility criteria are: (a) the applicant for registration of a SM REIT must be the investment manager on behalf of the REIT;(b) separate persons must be designated as investment manager and trustee of the SM REIT, and they should not be associated with each other; (c) the investment manager must (i) be clearly identified in the application for grant of registration and offer document; (ii) have a net worth of at least INR 20,00,00,000 (Indian Rupees twenty crore), out of which at least INR 10,00,00,000 (Indian Rupees ten crore) must be in the form of positive liquid net worth; (iii) have experience of at least 2 (two) years in the real estate industry or real estate fund management. Alternatively, the investment manager can employ atleast 2 (two) key managerial personnel, each possessing at least 5 (five) years' experience in real estate industry or real estate fund management; (iv) clearly describe the proposed activities of SM REIT at the time of making the application for registration; (d) the SM REIT and the parties to the SM REIT are fit and proper persons in terms of the SEBI (Intermediary) Regulations, 2008; and (e) the rights of unit holders are pro rata and pari passu and no unit holder should enjoy superior voting rights;
3. Conditions pertaining to initial offer of scheme by SM REIT: The SM REIT must make an initial offer of a scheme within 3 (three) years from the date of registration. The Amended REIT Regulations also prescribe the conditions to be complied with for the initial offer of a scheme, such as: (a) the investment manager must identify the assets proposed to be acquired or disclose relevant details such as features of the real estate assets in the draft offer document; (b) the minimum price of each unit of the SM REIT must be INR 10,00,000 (Indian Rupees ten lakh) or such amount as may be prescribed by SEBI; (c) the value of the real estate assets proposed to be acquired in each scheme should be at least INR 50,00,00,000 (Indian Rupees fifty crore); (d) the investment manager must file the draft scheme with SEBI through a merchant banker; (e) the draft scheme filed with SEBI will be made public for inviting comments by hosting it on the website of SEBI, designated stock exchanges and merchant bankers associated with the issue, for not less than 21 (twenty-one) days.
4. Investment Conditions: The SM REIT's scheme is mandated to invest at least 95% of the value of its assets in completed and revenue-generating properties. It is prohibited from investing in underconstruction or non-revenue-generating real estate assets. However, up to 5% in value of the scheme's assets can be invested in unencumbered liquid assets such as investment in mutual fund, fixed deposit;
5. Mode of fund raising: The SM REIT scheme may raise funds from any investor whether Indian or foreign by the way of issuance of units. However, the investment by foreign investors are subject to the guidelines of RBI and the Government of India;
6. Minimum public unitholding and delisting: The minimum offer and allotment to the public in each scheme of the SM REIT must be at least 25% of the total outstanding units of such scheme. The minimum public holding for the units of each scheme of SM REIT must be satisfied failing which action may be taken by SEBI and the designated stock exchange including delisting of units.

International Financial Services Centres

Financial services offered at International Financial Services Centres

The Ministry of Finance ("MoF"), vide notification dated January 18, 2024, has widened the scope of financial services offered in an International Financial Services Centre ("IFSC") to include:

1. book-keeping services;
2. accounting services;
3. taxation services; and
4. financial crime compliance services.

These financial services must be offered by units in an IFSC to non-residents whose business is not set up either by (a) splitting up of business already in existence in India; or (b) reconstructing of business already in existence in India; or (c) reorganising of a business already in existence in India. Further, the units must not offer the services by way of transferring or receiving of existing contracts or work arrangements from their group entities in India.

Listing of equity shares by public companies on international exchanges

The Ministry of Corporate Affairs, vide notification dated January 24, 2024, has issued the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 ("LES Rules") permitting certain public companies to list their equity shares directly on permitted stock exchanges in IFSCs in India. Some of the key provisions of the LES Rules are as follows:

1. the following companies can list their equity shares:
   1. unlisted public companies; and
   2. listed public companies, in accordance with regulations framed or directions issued in this regard by SEBI or the International Financial Services Centres Authority ("IFSCA");
2. the following companies are not eligible to list their equity shares in IFSC:
   1. it has been registered under Section 8 or declared as Nidhi under Section 406 of the CA 2013;
   2. it is a company limited by guarantee and also having share capital;
   3. it has any outstanding deposits accepted from the public as per Chapter V of the CA 2013 and rules made thereunder;
   4. it has a negative net worth;
   5. it has defaulted in payment of dues to any bank or public financial institution or nonconvertible debenture holder or any other secured creditor, which has not been made good, and if made good a period of 2 (two) years has not lapsed since the date of making good the default;
   6. it has made any application for winding-up under the CA 2013 or for resolution or winding-up under the Insolvency and Bankruptcy Code, 2016 ("IBC") and in case any proceedings against the company for windingup or for resolution or winding-up is pending;
   7. it has defaulted in filing of an annual return under Section 92 or financial statement under Section 137 of CA 2013; and
   8. an eligible unlisted public company, which has no partly paid-up shares.

Related provisions have also been incorporated in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("NDI Rules"), vide notification dated January 24, 2024, issued by the MoF. Permissible holders can purchase or sell equity shares of public Indian companies which are listed or to be listed on an international exchange. A newly inserted Schedule XI provides the framework for the direct listing of equity shares of companies on international exchanges. It lays down provisions on eligibility of public companies, voting rights and pricing. The public Indian company must ensure that the aggregate of equity shares which may be issued or offered in a permissible jurisdiction, along with equity shares already held in India by persons resident outside India, does not exceed the limit on foreign holding prescribed under the NDI Rules.

Accredited investors in IFSCs

IFSCA, vide circular dated January 25, 2024, has specified the eligibility criteria for accredited investors in IFSCs and the modalities for accrediting the investors. Some of the key provisions of the circular are as follows:

1. Eligibility criteria for accredited investors: Detailed criteria for eligibility of individuals, one person companies, Hindu undivided families, partnership firms, body corporates and trusts are specified. Companies, including LLPs, must have a net worth of at least USD 5,000,000 (United States Dollars five million) or all the constituents of the body corporate must independently meet the applicable eligibility criteria of accredited investors. Further, (a) Government and government-related investors in India and foreign jurisdictions, including central banks, Sovereign Wealth Funds ("SWFs"), and agencies, controlled or at least 75% owned by such entities, (b) multilateral agencies, (c) venture capital schemes, exchange traded funds and investment trusts in IFSCs (which are regulated in their jurisdiction and wherein no single investor holds more than 33% beneficial interest) and (d) family investment funds set up in IFSCs are deemed to be accredited investors.
2. Responsibilities of REs: The key responsibilities of REs accepting investors are detailed, such as: (a) laying down adequate procedures and policies for verifying and reviewing eligibility; (b) maintaining records of verification and confidentiality of investor information, and (c) informing investors of reduced investor protection measures for accredited investors and obtaining written confirmation of understanding the associated risks.
3. Withdrawal of consent: REs must establish a process for withdrawal of consent of an accredited investor, ensuring that previous transactions aren't affected by the change in status.

New regulations to govern payment services within IFSCs

IFSCA, vide notification dated January 29, 2024, notified the IFSCA (Payment Services) Regulations, 2024 ("Payment Service Regulations"). The key provisions are as follows:

1. any person seeking to provide payment services in or from an IFSC must require certificate of authorisation under the Payment Service Regulations;
2. an applicant seeking authorisation to provide payment services is required to be incorporated as a company with its registered office in an IFSC;
3. a payment service provider must, inter-alia, comply with the minimum net worth requirements, as specified in Schedule V of the Payment Service Regulations;
4. an applicant or a payment service provider must ensure that its directors, key managerial personnel and persons exercising control over it, satisfy the 'fit and proper requirements', specified in Schedule II of the Payment Service Regulations; and
5. the following 5 (five) services/activities have been currently permitted under the Payment Service Regulations. These are:
   1. account issuance service (including e-money account issuance service);
   2. e-money issuance service;
   3. escrow service;
   4. cross border money transfer service; and
   5. merchant acquisition service.

Maintenance of net worth by fund management entities

IFSCA, vide circular dated February 16, 2024, mandates an obligation on Fund Management Entities ("FMEs") to maintain specified net worth levels at all times, as stipulated under the IFSCA (Fund Management) Regulations, 2022, failing which such FME cannot (i) launch new schemes in IFSC; (ii) onboard new clients towards any of the activities; or (iii) undertake new business activities permitted under the IFSCA (Fund Management) Regulations, 2022 until the net worth is restored.

Application of the Banking Regulation Act, 1949 to financial products, services or institutions in IFSCs

MoF, vide notification dated February 28, 2024, has applied certain provisions of the Banking Regulation Act, 1949, with modifications, to financial products, financial services or financial institutions in IFSCs. The prescribed limits on holding shares in any company will not apply to an IFSC banking unit of a foreign bank for a transaction entered in the ordinary course of business where the shareholding is held by way of a security or if the shareholding or interest acquired or held in the course of satisfaction of debts due to it, is disposed of within 5 (five) years. Further, the restrictions to grant any loans or advances or entering into any commitment for granting any loan or advances does not apply to those made by an IFSC banking unit of a foreign bank.

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