RBI revamps FDI Regulations, revisits definitions of FDI

By CS Vinita Nair & Chahat Jain

corplaw@vinodkothari.com

10.11.2017

RBI vide notification No. FEMA 20(R)/ 2017-RB dated 7th November 2017 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (hereinafter referred as ‘Regulations, 2017’) in supersession of Notification No. FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB both dated May 3, 2000, Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (hereinafter referred as ‘Regulations, 2000’). The Regulations, 2017 will be effective from 8th November 2017 (Date of publication in the Official gazette) except proviso (ii) to sub-regulation 1 of regulation 10 of these Regulations and proviso (ii) to sub-regulation 2 of regulation 10 of these Regulations, reproduced hereunder as Annexure 1, which will come into effect from a date to be notified.

This article discusses the key amendments made inthe ‘Definition’ section of the Regulations. Detailed write up comparing Regulations, 2017 with Regulations, 2017 will be posted separately.

Definitions inserted/ amended in Regulation 2

 

Key Definitions inserted/ amended Our Analysis
“Capital instrument”  means equity shares, debentures, preference shares and share warrants, issued by an Indian Company;

 

Explanation:

 

(a) Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid. The expression ‘Debentures’ means fully, compulsorily and mandatorily convertible debentures.  ‘Preference shares’ means fully, compulsorily and mandatorily convertible preference shares.

 

Share Warrants are those issued by an Indian Company in accordance with the Regulations issued by the Securities and Exchange Board of India.

 

Capital instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.

 

(b) Partly paid shares that have been issued to a person resident outside India shall be fully called-up within twelve months of such issue. Twenty five percent of the total consideration amount (including share premium, if any), shall be received upfront.

 

(c) In case of share warrants at least twenty five percent of the consideration shall be received upfront and the balance amount within eighteen months of issuance of share warrants.

 

(d) Capital instruments shall include non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 shall be treated as debt and shall conform to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.

The corresponding definition of ‘Capital’ under Regulations, 2000 provided as under:

 

‘Capital’ means equity shares, preference shares and convertible debentures;

           

 “Explanation: The equity shares issued in accordance with the provisions of the Companies Act, as applicable, shall include equity shares that have been partly paid. Preference shares and convertible debentures shall be required to be fully paid, mandatorily and fully convertible.”

 

While the base definition remains intact, the definition of Capital Instruments under Regulations, 2017 expressly provides that warrants can be issued to a person resident outside India only in accordance with the Regulations issued by SEBI i.e. ICDR Regulations. Therefore, unlisted companies/ debt listed companies cannot issue warrants to person resident outside India.

Formerly, Section 114 and 115 of Companies Act, 1956 provided for issue of share warrants. Corresponding provisions were not inserted in Companies Act, 2013. Accordingly, following definition of ‘Warrants’ provided in Regulations, 2000 has also been deleted:

 

(xib)‘Warrant’ includes Share Warrant issued by an Indian Company in accordance to provisions of the Companies Act, as applicable. Such warrants shall be treated as security within the meaning of Section 2(za) of FEMA, 1999.

 

(xxvii) ‘Investment’ means to subscribe, acquire, hold or transfer any security or unit issued by a person resident in India;

 

Explanation:

(a) This will include to acquire, hold or transfer depository receipts issued outside India, the underlying of which is a security issued by a person resident in India.

 

(b) For the purpose of LLP, investment shall mean capital contribution or acquisition/ transfer of profit shares.

 

Regulations, 2000 referred to purchase or transfer. Regulations, 2017 defines ‘investment’ to include all possible means of acquisition as well as transfer of security or unit by person resident outside India and explains the meaning in case of depository receipts and investment in LLP.
(xvii) ‘Foreign Direct Investment’ (FDI) means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company;

 

Note: In case an existing investment by a person resident outside India in capital instruments of a listed Indian company falls to a level below 10 percent of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI.

 

Explanation: Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised

 

The definition segregates investment made in unlisted Indian company and listed Indian company.

 

Listed Indian Company’ means an Indian company which has any of its capital instruments listed on a recognized stock exchange in India and the expression ‘Unlisted Indian Company’ shall be construed accordingly;

 

Therefore any investment made by person resident outside India in an unlisted Indian company or Debt listed Indian Company (having NCDs or NCRPS listed) will be regarded as FDI.

 

However, in case of listed Indian Company has been segregated based on the quantum of investment made as a percentage of post issue paid-up equity capital on a fully diluted basis i.e. after giving effect to all possible conversions, eg. ESOPs, CCDs issued, Loan agreements having optionality clause etc.

 

Investment in in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company shall be regarded as FDI.

 

Anything less than that will be regarded as Foreign Portfolio Investment (Refer definition below).

xviii) ‘Foreign Investment’ means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP;

 

Explanation: If a declaration is made by persons as per the provisions of the Companies Act, 2013 about a beneficial interest being held by a person resident outside India, then even though the investment may be made by a resident Indian citizen, the same shall be counted as foreign investment.

 

Note: A person resident outside India may hold foreign investment either as Foreign Direct Investment or as Foreign Portfolio Investment in any particular Indian company.

 

The definition adequately clarifies that investments made on non-repatriable basis will be regarded as domestic investment.

 

NRIs are particularly eligible to make investments on a non-repatriable basis. These investments were treated at par with investments made by residents.

(xix) ‘Foreign Portfolio Investment’ means any investment made by a person resident outside India through capital instruments where such investment is less than 10 percent of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company;

 

Explanation: The 10 percent limit for foreign portfolio investors shall be applicable to each foreign portfolio investor or an investor group as referred in Securities and Exchange Board of India  (Foreign Portfolio Investors) Regulations, 2014

SEBI (FPI) Regulations, 2014 defines ‘Foreign Portfolio Investor’.  As per Regulation 21 (1) (a) of FPI Regulations provides that FPIs can invest in securities in the primary and secondary markets including shares, debentures and warrants of companies, listed or to be listed on a recognized stock exchange in India;

 

Further, Regulation 21 (7) of FPI Regulations provides that the purchase of equity shares of each company by a single foreign portfolio investor or an investor group shall be below ten percent of the total issued capital of the company.  The maximum permissible investment is provided under Schedule 2 of Regulations, 2017.

As per the definition of ‘Foreign Portfolio Investment’ given in Regulations, 2017 any investment less than 10 percent of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company will not be regarded as FDI.

(xxxvii) ‘Resident Indian citizen’ means an individual who is a person resident in India and is citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955;

 

As per Consolidated FDI Policy, 2017 ‘Resident Indian Citizen’ shall be interpreted in line with the definition of ‘person resident in India’ as per FEMA, 1999, read in conjunction with the Indian Citizenship.

 

The term ‘person resident in India’ has been defined in FEMA Act.

(xxxv) ‘Non-Resident Indian (NRI)’ means an individual resident outside India who is citizen of India;

 

(xxxvi) ‘Overseas Citizen of India (OCI)’ means an individual resident outside India who is registered as an

Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955;

Regulations, 2000 defined NRI as an individual resident outside India who is citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.

 

The said definition has been split into two and accordingly reference has been made throughout Regulations, 2017.

Definitions aligned with Act, 2013/ DIPP notifications/ Consolidated FDI Policy

 

Definitions aligned Our Analysis
(x) ‘Employees’ stock option’ (ESOP) means an ESOP as defined under the Companies Act, 2013 and issued under the regulations issued by the Securities and Exchange Board of India. Aligned with Act, 2013.
(xli) ‘Startup’ means an entity which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India;

 

(xlii) ‘Startup company’ means a private company incorporated under the Companies Act, 2013 and recognized 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, Government of India and complies with the conditions laid down by it;

 

Linked to Notification issued by DIPP.
(xliii) ‘Sweat equity shares’ means sweat equity shares as defined under the Companies Act, 2013; Aligned with Act, 2013
Other definitions inserted includes that of ‘Authorized Bank’, ‘Authorized Dealer’, ‘FDI linked performance conditions’,

 

Definitions deleted

 

  • Definition of ‘Foreign Institutional Investor’ and ‘Qualified Foreign Investor’ has been deleted in view of their inclusion as Foreign Portfolio Investor;
  • Definition of ‘Warrants’ has been deleted as Regulations, 2017 only permit issuance of warrants in accordance with SEBI (ICDR) Regulations.

 

Annexure 1

Amendments to take effect subsequently:

 

Proviso (ii) to sub-regulation 1 of regulation 10 of these Regulations;

  1. Transfer of capital instruments of an Indian company by or to a person resident outside India

(1) A person resident outside India, not being a non-resident Indian or an overseas citizen of India or an erstwhile overseas corporate body may transfer by way of sale or gift the capital instruments of an Indian company or units held by him to any person resident outside India;

Explanation: It shall also include transfer of capital instruments of an Indian company pursuant to liquidation, merger, de-merger and amalgamation of entities/ companies incorporated or registered outside India

Provided that

(ii) where the person resident outside India is an FPI and the acquisition of capital instruments made under Schedule 2 of these regulations has resulted in a breach of the applicable aggregate FPI limits or sectoral limits, the FPI shall sell such capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by Reserve Bank in consultation with the Central Government. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale, provided the sale is within the prescribed time limit, shall not be reckoned as a contravention under these Regulations. The guidelines issued by Securities and Exchange Board of India in this regard shall be applicable.

Proviso (ii) to sub-regulation 2 of regulation 10 of these Regulations

  1. Transfer of capital instruments of an Indian company by or to a person resident outside India

(2) An NRI or an OCI holding capital instruments of an Indian company or units on repatriation basis may transfer the same by way of sale or gift to any person resident outside India;

Provided that

(ii) where the acquisition of capital instruments by an NRI or an OCI under the provisions of Schedule 3 of these regulations has resulted in a breach of the applicable aggregate NRI/ OCI limit or sectoral limits, the NRI or the OCI shall sell such capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by Reserve Bank in consultation with the Central Government. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale, provided the sale is within the prescribed time, shall not be reckoned as a contravention under these Regulations.

 

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