Brief of Amendments reflecting in FDI Policy, 2017

CS Vinita Nair, corplaw@vinodkothari.com

The Department of Industrial Policy and Promotion (DIPP) has issued the Consolidated FDI Policy 2017 (Policy 2017)[1] incorporating the amendments made to the erstwhile Consolidated FDI Policy 2016 (Policy 2016) through various Press Notes issued during the year 2016 (Press Notes 5 and 6 of 2016 series) and 2017 (Press Note 1 of 2017 series) as well as amendments made in FEMA (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2000 (FDI Regulations) through various RBI notifications. This article describes the amendments made after comparing Policy 2016 and Policy 2017.

  • Definition of ‘Competent Authority’ inserted in view of Standard Operating Procedure (SOP) for Processing FDI Proposals issued on June 29, 2017[2].
    • Definition: ‘Competent Authority’ means the concerned Administrative Ministry/Department empowered to grant government approval for foreign investment under the extant FDI Policy and FEMA Regulations.

 

  • Definition of ‘Convertible Note’ inserted in view of RBI Notification No. 377/ 2016-RB dated 10th January, 2017[3]
    • Definition: ‘Convertible Note’ means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

 

  • Definition of “FDI linked performance conditions’ inserted in view of the term used in case of FDI in LLPs.
    • Definition: ‘FDI linked performance conditions’ means the sector specific conditions for companies receiving foreign investment.
  • Definition of FIPB deleted in view of abolition of FIPB.
  • New insertion in FDI in Limited Liability Partnerships (LLPs) (Para 3.2.4) in view of RBI Notification No. FEMA.385/2017-RB dated March 03, 2017[4].
    • (iii) Conversion of an LLP having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions, into a company is permitted under automatic route. Similarly, conversion of a company having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions, into an LLP is permitted under automatic route.

 

  • Separate Para 3.2.6 for FDI in Start-ups inserted in view of insertion of Regulation 6D in FDI Regulations vide RBI Notification No. 377/ 2016-RB dated 10th January, 2017[5] to the following effect:

“(1) A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty five lakh rupees or more in a single tranche.

Explanation: For the purpose of this Regulation, a ‘startup company’ means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

(2) A startup company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government.

Explanation: For the purpose of this regulation, the issue of shares against such convertible notes shall have to be in accordance with the Schedule 1 of the Principal Regulations.

(3) A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

Provided that an escrow account for the above purpose shall be closed immediately after the requirements are completed or within a period of six months, which ever is earlier. However, in no case continuance of such escrow account shall be permitted beyond a period of six months.

(4) NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Principal Regulations.

(5) A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI. Prior approval from the Government shall be obtained for such transfers in case the startup company is engaged in a sector which requires Government approval.

(6) The startup company issuing convertible notes shall be required to furnish reports as prescribed by Reserve Bank”

  • Insertion of ‘3.7.2’ under Para 3.7 dealing with Other conditions on Investment besides entry conditions in view of press note 5 of 2016 dated June 24, 2016[6] to the following effect:
    • “3.7.2 For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, approval of Reserve Bank of India is not required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted.”

 

  • Reporting of Downstream Investment [Para 3.8.4.2]: Earlier downstream investments by eligible Indian entities/LLPs were required to be notified to SIA, DIPP and FIPB in the form available at http://www.fipbindia.com within 30 days of such investment. With the abolishment of FIPB and formation of Foreign Investment Facilitation Portal by DIPP, Policy 2017 mandates such an entity to notify RBI and Foreign Investment Facilitation Portal of its downstream investment in the form available at www.fifp.gov.in within 30 days of such investment.

 

  • Erstwhile Chapter 4 dealing with FIPB has been deleted. Current Chapter 4 deals with Procedure for Government Approval in view of Standard Operating Procedure (SOP) for Processing FDI Proposals issued on June 29, 2017[7]. Separate write up on SOPs for processing FDI can be viewed here.
    • Cases which do not require Fresh Approval has been amended suitably to substitute reference made to FIPB/CCEA with ‘Government’ and incorporated as Para 4.2;
    • Online filing of applications for Government Approval (Para 4.3) is similar to Para 4.4.1 of Policy, 2016. Reference made of FIPB has been deleted. Further, website reference has been changed to Foreign Investment Facilitation Board (fifp.gov.in).
  • Chapter 5 dealing with Sector specific conditions has been amended in view of press notes issued from time to time to following effect:
    • Para 5.2.1 dealing with Agriculture & Animal Husbandry amended in line with Para 3 of Press Note No. 5 of 2016 dated June 24, 2016;
    • Para 5.2.5 dealing with manufacturing amended in line with Para 4 of Press Note No. 5 of 2016 dated June 24, 2016;
    • Para 5.2.6 dealing with defence amended in line with Para 5 of Press Note No. 5 of 2016 dated June 24, 2016;
    • Para 5.2.7.1 dealing with Broadcasting carriage services amended in line with Para 6 of Press Note No. 5 of 2016 dated June 24, 2016;
    • Para 5.2.9 dealing with Civil Aviation amended in line with Para 7 of Press Note No. 5 of 2016 dated June 24, 2016;
    • Para 5.2.13 dealing with Private Security Agencies amended in line with Para 8 of Press Note No. 5 of 2016 dated June 24, 2016;
    • Para 5.2.15.3 dealing with Private Security Agencies amended in line with Para 9 of Press Note No. 5 of 2016 dated June 24, 2016;
    • Para 5.2.27 dealing with Pharmaceuticals amended in line with Para 10 of Press Note No. 6 of 2016 dated June 24, 2016;
    • Separate write up on Press Note No. 5 of 2016 dated June 24, 2016 can be viewed here.
    • Para 5.2.21 dealing with Infrastructure Company in Securities Market amended in line with Para 2 of Press Note No. 1 of 2017 dated February 20, 2017;
    • Para 5.2.26 dealing with NBFCs amended to ‘Other Financial Services’ in line with Para 2 of Press Note No. 6 of 2016 dated October 25, 2016.[8]
      • Separate write up on Press Note No. 6 of 2016 dated October 26, 2016 can be viewed here.
    • In Annexure 3 for provisions relating to issue/ transfer of shares, in case of escrow account [ Para 4 (iv)] separate point has been inserted in view of Regulation 10A of FDI Regulations inserted vide RBI Notification No.FEMA.368/2016-RB dated May 20, 2016[9] to the following effect:
      • “In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement. For this purpose, if so agreed between the buyer and the seller, an escrow arrangement may be made between the buyer and the seller for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the transfer agreement or if the total consideration is paid by the buyer to the seller, the seller may furnish an indemnity for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the payment of the full consideration.

 

Provided the total consideration finally paid for the shares must be compliant with the applicable pricing guidelines”

               

  • In Annexure 3 for provisions relating to issue/ transfer of shares, in case of Conversion of ECB/Lump sum Fee/Royalty etc. into Equity [Para 6], sub-para (iii) added in view of RBI Notification No.FEMA.373/2016-RB dated October 24, 2016[10] in relation to issue of equity shares or preference shares or convertible debentures or warrants to the said non-resident entity against pre-incorporation/ pre-operative expenses by a wholly owned subsidiary. Separate write up 2016 can be viewed here
    • “(iii) A wholly owned subsidiary set up in India by a non-resident entity, operating in a sector where 100 percent foreign investment is allowed in the automatic route and there are no FDI linked conditionalities, may issue equity shares or preference shares or convertible debentures or warrants to the said non-resident entity against pre-incorporation/ pre-operative expenses incurred by the said non-resident entity up to a limit of five percent of its capital or USD 500,000 whichever is less, subject to the conditions laid down below.
  1. Within thirty days from the date of issue of equity shares or preference shares or convertible debentures or warrants but not later than one year from the date of incorporation or such time as Reserve Bank of India or Government of India permits, the Indian company shall report the transaction in the Form FC-GPR to the Reserve Bank.

 

  1. The valuation of the equity shares or preference shares or convertible debentures or warrants shall be subject to the provisions of Paragraph 5 of Schedule 1 of these Regulations.
  2. A certificate issued by the statutory auditor of the Indian company that the amount of pre-incorporation/pre-operative expenses against which equity shares or preference shares or convertible debentures or warrants have been issued has been utilized for the purpose for which it was received should be submitted with the FC-GPR form.

 

Explanation: Pre-incorporation/pre-operative expenses shall include amounts remitted to Investee Company’s account, to the investor’s account in India if it exists, 69 to any consultant, attorney or to any other material/service provider for expenditure relating to incorporation or necessary for commencement of operations.”


[1] http://dipp.nic.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17_0.pdf

[2] http://fipb.gov.in/Forms/SOP.pdf

[3] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10825&Mode=0

[4] https://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=10876

[5] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10825&Mode=0

[6] http://dipp.nic.in/sites/default/files/pn5_2016.pdf

[7] http://fipb.gov.in/Forms/SOP.pdf

[8] http://dipp.nic.in/sites/default/files/pn6_2016.pdf

[9] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10431&Mode=0

[10] https://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=10710

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