RBI revamps FDI Regulations
By CS Vinita Nair
corplaw@vinodkothari.com
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[1] (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 in the operating part of Regulations, 2017 including Schedules. The write up on the ‘Definition’ section of the Regulations has been posted separately[2].
Limits prescribed based on total paid-up equity capital on a fully diluted basis
Regulations, 2000 did not specify for computing limits as a percentage of the total paid-up equity capital on a fully diluted basis. Regulations, 2017 expressly provides in the definition of FDI, Foreign Portfolio Investment and in other relevant provisions to consider total equity paid up capital on a fully-diluted basis.
FDI v/s Foreign Portfolio Investment
In case of Listed Indian Company, any investment that is less than 10 percent of the 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 shall be regarded as Foreign Portfolio Investment.
Where the investment increases to 10 percent or more of the total paid-up equity capital on a fully diluted basis or 10 percent or more of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company, the total investment made by the FPI shall be re-classified as FDI subject to the conditions as specified by Securities and Exchange Board of India and the Reserve Bank in this regard and the investee company and the investor complying with the reporting requirements prescribed in regulation 13 of these Regulations.
Aggregate Foreign Portfolio Investment up to 49 percent of the paid-up capital on a fully diluted basis or the sectoral/ statutory cap, whichever is lower, will not require Government approval or compliance of sectoral conditions as the case may be, if such investment does not result in transfer of ownership and control of the resident Indian company from resident Indian citizens or transfer of ownership or control to persons resident outside India. Other investments by a person resident outside India will be subject to conditions of Government approval and compliance of sectoral conditions as laid down in these regulations.
Downstream Investments
While the provisions remain similar to that provided in Regulations, 2000 the insertion has been as under:
- The downstream investment should have the approval of the Board of Directors as also a
Shareholders’ Agreement, if any;
- With effect from 31st day of July, 2012, downstream investment/s made under Corporate Debt Restructuring (CDR), or other loan restructuring mechanism, or in trading book, or for acquisition of shares due to defaults in loans, by a banking company, as defined in clause (c) of section 5 of the Banking Regulation Act, 1949, incorporated in India, which is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India, shall not count towards indirect foreign investment. However, their strategic downstream investment shall be counted towards indirect foreign investment for the company in which such investment is being made.
Transfer of shares
In line with Regulations, 2000 the present Regulations also provide for transfer by way of sale or gift of capital instruments/ units of an investment vehicle by and between:
- PROI to PROI [Regulation 10 (1)];
- In case of transfer of capital instruments by a person resident outside India to another person resident outside India by way of sale or gift, where the person resident outside India is an FPI and the acquisition of capital instruments made under Schedule 2 of Regulations, 2017 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.
- NRI/ OCI to any PROI [Regulation 10 (2)]. Regulations, 2000 mandated transfer to another NRI only;
- 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.
- PROI to PRII [Regulation 10 (3)];
- PRII to PROI by way of sale [Regulation 10 (4)];
- PRII or NRI/ OCI (eligible investor under Schedule 4 i.e. on non-repatriation basis) by way of gift, with prior approval of RBI [Regulation 10 (5)];
- NRI/ OCI (eligible investor under Schedule 4 i.e. on non-repatriation basis) by way of gift to an NRI/ OCI (eligible investor under Schedule 4 i.e. on non-repatriation basis) [Regulation 10 (6)] on a non-repatriable basis;
- Exit by PROI with optionality clause, without any assured return [Regulation 10 (7)];
- Transfer by erstwhile OCBs shall be as per directions issued by RBI [Regulation 10 (8)];
- PRII to PROI with payment of an amount not exceeding 25% of total consideration on deferred basis [Regulation 10 (9)];
- PRII to PROI where an escrow account is opened by PROI [ Regulation 10 (10)];
- Creation of pledge in favour of recognized lender in case of ECB, bank in India, overseas bank, NBFC registered with RBI [Regulation 10 (12)];
Onus of Reporting transfer in FC-TRS
Regulations, 2000 laid the onus of submission of the form FC-TRS within the specified time on the transferor / transferee, resident in India
Regulations, 2017 lays onus on the resident transferor/ transferee or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be. In case of transfer under Regulation 10 (9), the onus of reporting shall be on the resident transferor/ transferee.
Delayed reporting of FDI can be made with payment of late submission fee
Regulations, 2000 did not provide anything on filing of documents beyond time. As per Master Direction on Compounding of Contraventions under FEMA, 1999, RBI had inter-alia delegated the power to Regional Offices to compound the contravention in relation to:
- Delay in reporting inward remittance received for issue of shares;
- Delay in filing form FC(GPR) after issue of shares;
- Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA Return), by all Indian companies which have received Foreign Direct Investment in the previous year(s) including the current year;
- Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident;
- Delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident.
FDI Reporting requirements under Regulations, 2017 are as under:
Form | Purpose | To be filed with | Timeline |
Advance Remittance Form (ARF): | Reporting of amount of consideration received for issue of capital instruments and where such issue is reckoned as Foreign Direct Investment. | Regional Office concerned of RBI under whose jurisdiction the Registered office of the company operates | Within 30 days from date of receipt. |
Form Foreign Currency- Gross Provisional Return (FC-GPR): | Reporting of capital instruments issued to a person resident outside India and where such issue is reckoned as Foreign Direct Investment.
Issue of ‘participating interest/ rights’ in oil fields shall be reported Form FC-GPR | Regional Office concerned of RBI under whose jurisdiction the Registered office of the company operates | Within 30 days from date of issue of capital instruments/ participating interest/ rights’ in oil fields |
Annual Return on Foreign Liabilities and Assets (FLA): | Annual reporting by Indian company which has received FDI or LLP which has received capital contribution in the previous year(s) including the current year | RBI (done vide email) | on or before the 15th day of July of each year. |
Form Foreign Currency-Transfer of Shares (FC-TRS) | For following transfers: · PROI (RB) to PROI (NRB)[3]; · PROI (RB) to PRII[4]; · PROI (NRB) to PRII – need not be reported; · By PROI on RSE[5] · Between PRII and PROI under Regulation 10 (9)[6]; · Participating interest/ rights’ in oil fields | Authorised Dealer Bank | Within sixty days of transfer of capital instruments or receipt / remittance of funds whichever is earlier.
In case of transfer as per Regulation 10 (9), reporting to be done on receipt of every tranche of payment. |
Form Employees’ Stock Option (ESOP): | An Indian company issuing employees’ stock option to persons resident outside India. | Regional Office concerned of RBI under whose jurisdiction the Registered office of the company operates | within 30 days from the date of issue of employees’ stock option.
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Form Depository Receipt Return (DRR): | Reporting of issue/ transfer of depository receipts issued in accordance with the Depository Receipt Scheme, 2014 by the Domestic Custodian. | RBI | within 30 days of close of the issue. |
Form LLP (I): | LLP receiving amount of consideration for capital contribution and acquisition of profit shares | Regional Office of the RBI under whose jurisdiction the Registered Office of the LLP is situated, | within 30 days from the date of receipt of the amount of consideration |
Form LLP (II): | Disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) | Authorised Dealer Bank | within 60 days from the date of receipt of funds |
LEC(FII): | Purchase/ transfer of capital instruments by FPIs to be reported by Authorised Dealer Category I banks | RBI | No timeline specified. |
LEC(NRI): | Purchase/ transfer of capital instruments by Non-Resident Indians or Overseas Citizens of India to be reported by Authorised Dealer Category I banks | RBI | No timeline specified. |
Downstream Investment (Form DI) | An Indian company making downstream investment in another Indian company which is considered as indirect foreign investment for the investee company. | Secretariat for Industrial Assistance, DIPP | within 30 days of such investment and, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures (with/without expansion programme |
Form Convertible Notes (CN): | Issue of CN to a PROI by an Indian startup company; or Transfer of CN to or from PROI. | Authorised Dealer bank | within 30 days of such transfer |
Note: The format, periodicity and manner of submission of such reporting shall be as prescribed by Reserve Bank in this regard. Unless otherwise specifically stated in these regulations all reporting shall be made through or by an Authorised Dealer bank, as the case may be.
Valuation can be done by practicing Cost Accountant
In case of an unlisted Indian company, the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis can be certified by a practicing Cost Accountant.
Issue of capital instruments within 60 days
Para 2 (2) of Schedule 1 provides that Capital instruments shall be issued to the person resident outside India making such investment within sixty days from the date of receipt of the consideration. In case of partly paid equity shares, the period of 60 days shall be reckoned from the date of receipt of each call payment.
Regulations, 2000 mandated issuance within 180 days from receipt of inward remittance. Companies Act, 2013 provides to allot securities within 60 days of receipt of application money or advance for such securities. Section 42 (6) of Act, 2013 provides for interest payable at the rate of twelve percent per annum from the expiry of sixtieth day.
Regulation, 2017 aligns the requirement to issue capital instruments with Act, 2013. Further, proviso has been inserted to the effect that prior approval of RBI will be required for payment of interest in case of any delay in refund of the amount.
Rights issue/ bonus issue/ ESOPs issued
While the provisions in relation to rights issue and bonus issue are broadly similar to those under Regulations, 2000 one of the key changes is in relation to subscribing to shares renounced in favor of person resident outside India.
Under Regulations, 2000 the investee company could allot the additional rights shares out of unsubscribed portion, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap.
As per the explanation inserted in Regulations, 2017, it has been specified that the restriction in relation to repatriation in case where (a) original investment was made on non-repatriation basis or (b) the person was a resident in India when the rights was issued shall be applicable even in case of person resident outside India makes investment on account of shares renounced in its favor by the person to whom it was offered.
Similarly, in case of ESOP the provisions are broadly similar to Regulations, 2000 except the proviso inserted. Accordingly, an employee who was a person resident in India when the options were granted cannot repatriate the sale proceeds after selling the shares so acquired pursuant to exercise of options.
[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11161&Mode=0
[2] http://vinodkothari.com/blog/rbi-revamps-fdi-regulations-revisits-definitions-of-fdi/
[3] PROI – Person Resident Outside India; RB – Repatriation basis; NRB – Non Repatriation Basis.
[4] PRII- Person Resident In India
[5] RSE – Recognised Stock Exchange
[6] (9) In case of transfer of capital instruments between a person resident in India and a person resident outside India, an amount not exceeding twenty five percent of the total consideration
(a) can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement; or
(b) can be settled through an escrow arrangement between the buyer and the seller for a period not exceeding eighteen months from the date of the transfer agreement; or
(c) can be indemnified by the seller for a period not exceeding eighteen months from the date of the payment of the full consideration, if the total consideration has been paid by the buyer to the seller. Provided the total consideration finally paid for the shares shall be compliant with the applicable pricing guidelines.
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