Ministry of Finance notifies FEM (Non-Debt Instruments) (Amendment) Rules, 2022
– Team Corplaw | corplaw@vinodkothari.com
Changes in ECB and Trade Credits Policy due to LIBOR Transition
– Team Finserv (finserv@vinodkothari.com)
Relevant links:
- RBI Circular dated December 8, 2021 – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12204&Mode=0
- Master Direction – ECB, Trade Credits and Structured Obligations – https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510
- Roadmap for LIBOR Transition – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12128&Mode=0
Our write-ups on financial interests – https://vinodkothari.com/category/financial-services/
Increase in FDI Limit in Insurance Companies
Corplaw Team | corplaw@vinodkothari.com
Amendment in Foreign Exchange Management (NDI) Rules, 2019 effective August 19, 2021- https://egazette.nic.in/WriteReadData/2021/229165.pdf
DPIIT Press Note on June 14, 2021 amending the FDI Policy for Insurance companies which shall be effective from date of FEMA notification – https://dpiit.gov.in/sites/default/files/pn2-2021.pdf
Consequential amendment in Indian Insurance Companies (Foreign Investment) Rules, 2015 are on May 19, 2021 – https://financialservices.gov.in/sites/default/files/Indian%20Insurance%20Companies%20(Foreign%20Investment%20)(amendment)%20Rules,%202021.pdf
Insurance (Amendment) Act, 2021 is passed on March 25, 2021 to increase FDI limit – https://financialservices.gov.in/sites/default/files/Insurance%20(Amendment)%20Act%202021%2025_3_2021.pdf
Proposed framework for overseas Investments by entities and individuals
Proposes segregation of regulatory and the operational part in rules and regulations respectively
FCS Vinita Nair |Senior Partner, Vinod Kothari & Company
Investments by Indian entities outside India is a very common phenomenon and several companies have presence outside India by virtue of forming a Joint Venture (‘JV’) and Wholly Owned Subsidiaries (‘WOS’)
With the enforcement of amendment proposed in Finance Act, 2015 in October, 2019[1] powers vested with Central Government (CG) and Reserve Bank of India (RBI) with respect to permissible Capital Account Transaction were revisited. Power to frame rules relating to Non-Debt instruments (‘NDI’) were vested with CG and to frame regulations relating to debt instruments were vested with RBI. The scope of NDI inter alia covers all investment in equity instruments in incorporated entities: public, private, listed and unlisted; acquisition, sale or dealing directly in immoveable property.
RBI intends to combine erstwhile FEMA (Transfer or Issue of Foreign Security) Regulations, 2004[2] (‘erstwhile ODI regulations’) and FEMA (Acquisition and Transfer of immoveable property outside India) Regulations, 2015[3] into FEMA (Non-debt Instruments – Overseas Investment) Rules, 2021[4] (‘NDI Rules’) and FEMA (Overseas Investment) Regulations, 2021[5] (‘OI Regulations’) and has rolled out the draft regulations for public comments to be sent by August 23, 2021[6].
NDI Rules v/s OI Regulations
NDI Rules will provide the regulatory framework for making of overseas investment covering the permissions, conditions for making overseas investment, restrictions from making Overseas Direct Investment (‘ODI’), pricing guidelines, transfer, liquidation and restructuring of ODI. While the NDI Rules will be framed by CG, however, the same will be administered by the RBI.
OI Regulations, on the other hand, will provide only the operational part covering conditions for undertaking Financial Commitment (‘FC’), other than investment in equity capital, consideration in case of acquisition or transfer of equity capital of a Foreign Entity (‘FE’), mode of payment, obligations of Persons Resident in India (‘PRII’), reporting requirements, consequence of delay in reporting and restrictions on further FC/ transfer.
Components of Overseas Investment
Under the erstwhile ODI regulations, currently in force, there is a concept of direct investment outside India in JV and WOS that excludes portfolio investment and FC. NDI Rules combine the two to define FC and separately defines the term Overseas Portfolio Investment (‘OPI’). Overseas Investment (‘OI’) is FC + OPI.
The classification as ODI depends on the nature of instruments in which investment is made, the nature of the entity in which investment is made and whether control has been acquired or not.
The diagram below provides a snapshot of the same.
Approval requirement proposed
The NDI Rules provides investments that require prior approval of Central Government, RBI and NOC from lender banks/ regulatory body etc. The Erstwhile ODI Regulations only mandated prior approval of RBI in case eligibility conditions stipulated were not met by the Indian party or resident individual.
Other amendments proposed
- ODI in technology ventures through an Overseas Technology Fund (OTF) permitted for listed IE with minimum net worth of Rs. 500 crore, for the purpose of investing in overseas technology startups engaged in an activity which is in alignment with the core business of such IE.
- Limit of FC upto 400% of networth will not apply to FC made by “Maharatna” PSUs or “Navratna” PSUs or subsidiaries of such PSUs in foreign entities outside India engaged in strategic sectors. Strategic sectors defined to include energy and natural resources sectors such as Oil, Gas, Coal and Mineral Ores or any other sector that may be advised by CG.
- Definition of net worth to be aligned with Companies Act, 2013.
- Sub-limits for determination of FC (50% of performance guarantee, 100% of corporate guarantee) is proposed to be done away with.
- Applicability of provisions in case of investments made in or by units in IFSC clarified.
- Bona fide activity defined to mean such business activities legally permissible both in India and host jurisdiction.
- Permissible range of 5% of the fair value arrived on an arm’s length basis as per any internationally accepted pricing methodology for valuation duly certified by a registered valuer as per the Companies Act 2013; or similar valuer registered with the regulatory authority in the host jurisdiction to the satisfaction of the AD bank provided along with period of validity of valuation certificate upto 6 months before the date of the transaction.
- Reporting of FC and OPI to be done in distinct forms.
- Prohibition on further FC to continue until any delay in reporting is regularized. The erstwhile ODI regulations restricted only in case of non-filing of Form APR.
- Restriction on acquisition of immoveable property outside India will not apply in case the same is acquired on lease by PRII for a period not exceeding 5 years. Manner of transfer of immoveable properties also prescribed.
- Source of funds for acquiring immoveable property outside India to include limit under Liberalised Remittance Scheme (LRS) and out of income/ sale proceeds of the assets, other than ODI.
Our other videos and write-ups may be accessed below:
YouTube:
https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg
Other write-up relating to corporate laws:
https://vinodkothari.com/category/corporate-laws/fema/
[1] https://egazette.nic.in/WriteReadData/2019/213265.pdf
[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2126&Mode=0
[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10257&Mode=0
[4] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4024
[5] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4023
[6] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52026
Downstream Investment Not to Result in Indirect Foreign Investment
For entities owned and controlled NRIs investing on non-repatriation basis
Updated as on August 10, 2021
Shreya Masalia | Executive
Foreign investments in equity instruments by a person resident outside India (PROI) is governed by Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules)[1] and the Consolidated FDI Policy[2] as amended from time to time. Foreign investments can be made on a repatriation basis or non-repatriation basis.
Repatriation and Non-Repatriation Basis
When the proceeds on investments made in India by a PROI can be transferred abroad after the exclusion of all applicable taxes refers to investments made on a repatriable basis and are regarded as foreign direct investment (FDI) or foreign portfolio investment based on the thresholds and other conditions laid down under NDI Rules.
In case of Investments on a non-repatriable basis, the same is not eligible to be remitted outside India (rule 2(ad) of NDI Rules r.w. para 2.1.31. of the FDI Policy, 2020). Subject to the provisions of schedule IV to the NDI Rules, investments made by a Non-Resident Indian(NRI) on a non-repatriation basis are deemed to be domestic investments and are considered on par with investments made by residents.
Downstream Investments by NRIs
Downstream Investment’ means investments made by an Indian entity or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity that has received investment from abroad. It includes entities in which a foreign entity which owns or controls more than 50% of the voting power by virtue of its investments, shareholding, or has power to appoint management of the company. Such a foreign entity is referred to as a foreign-owned and controlled company (FOCC) (explanation to rule 23 of NDI Rules r.w. Annexure 4 of the FDI Policy).
Where the investment received from an Indian company from a foreign entity is utilized to invest in the capital instrument of any other Indian company, it will be regarded as indirect foreign investment and the investor company will have to report the same in Form DI with the Reserve Bank of India within a period of 30 days from date of allotment of the equity instruments[3] (para 12 of FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019).
Need for a clarification
Though the investment made by an NRI on a non-repatriation basis was considered as on par with resident investments and were treated like domestic investments, the investment made by Indian entities owned and controlled by NRIs had no specific carve-out for the same. No clarity existed as to whether such an investment would attract the reporting and other compliance requirements of downstream investments.
Regulatory Changes
To address the ambiguity mentioned above, DIPP had released a press release dated March 19, 2021[4] amending the FDI Policy to provide that any investment in Indian entities by Indian entities which are owned and controlled by NRIs shall not form part of the calculation for indirect foreign investment.
On the same lines, the Ministry of Finance, vide notification dated August 06, 2021[5] amended the NDI Rules with immediate effect and inserted a new explaination to section 23(7)(i)(A) which provides that an investment made by an Indian entity which is owned and controlled by NRI’s on non-repartriation basis shall not be considered for calculation of indirect foreign investment.
Accordingly, the investment in Indian entities by Indian entities owned and controlled by NRIs will be considered at par with resident investments. Prior to the amendment, there was no clarity on whether what could be done directly under law was allowed indirectly too. The same has now been addressed.
[1] https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=11723
[2] https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_1.pdf
[3] https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=11723
RBI aligns list of compoundable contraventions under FEMA with NDI Rules
‘Technical’ contravention subject to minimum compoundable amount, format for public disclosure of compounding orders revised.
– CS Burhanuddin Dohadwala | corplaw@vindkothari.com
Introduction
Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. It provides comfort to any person who contravenes any provisions of FEMA, 1999 [except section 3(a) of the Act] by minimizing transaction costs. Reserve Bank of India (‘RBI’) is empowered to compound any contraventions as defined under section 13 of FEMA, 1999 (‘the Act’) except the contravention under section 3(a) of the Act in the manner provided under Foreign Exchange (Compounding Proceedings) Rules, 2000. Provisions relating to compounding is updated in the RBI Master Direction-Compounding of Contraventions under FEMA, 1999[1].
Following are few advantages of compounding of offences:
- Short cut method to avoid litigation;
- No further proceeding will be initiated;
- Minimize litigation and reduces the burden of judiciary;
Present Circular
Pursuant to the supersession of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017[2] (‘TISPRO”)and issuance of FEM (Non-Debt Instrument) Rules, 2019[3] [‘NDI Rules] and FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019[4] [‘MPR Regulations’], RBI has updated the reference of the erstwhile regulations in line with the NDI Rules and MPR Regulations vide RBI Circular No.06 dated November 17, 2020[5] (‘Nov 2020 Circular’).
Additionally, the Nov 2020 Circular does away with the classification of a contravention as ‘technical’, as discussed later in the article.
Lastly, the Nov 2020 Circular modifies the format in which the compounding orders will be published on RBI’s website.
Compounding of contraventions relating to foreign investment
The power to compound contraventions under TISPRO delegated to the Regional Offices/ Sub Offices of the RBI has been aligned with corresponding provisions under NDI Rules and MPR Regulation as under:
| Compounding of contraventions under NDI Rules | |||
| Rule No. | Deals with | Corresponding regulation under TISPRO | Brief Description of Contravention |
| Rule 2(k) read with Rule 5 | Permission for making investment by a person resident outside India; | Regulation 5 | Issue of ineligible instruments |
| Rule 21 | Pricing guidelines; | Paragraph 5 of Schedule I | Violation of pricing guidelines for issue of shares. |
| Paragraph 3 (b) of Schedule I | Sectoral Caps; | Paragraph 2 or 3 of Schedule I | Issue of shares without approval of RBI or Government respectively, wherever required. |
| Rule 4 | Restriction on receiving investment; | Regulation 4 | Receiving investment in India from non-resident or taking on record transfer of shares by investee company. |
| Rule 9(4) | Transfer by way of gift to PROI by PRII of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank. | Regulation 10(5) | Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India. |
| Rule 13(3) | Transfer by way of gift to PROI by NRI or OCI of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank. | ||
| Compounding of contraventions under MPR Regulations | |||
| Regulation No. | Deals With | Corresponding regulation under TISPRO | Brief Description of Contravention |
| Regulation 3.1(I)(A) | Inward remittance from abroad through banking channels; | Regulation 13.1(1) | Delay in reporting inward remittance received for issue of shares. |
| Regulation 4(1) | Form Foreign Currency-Gross Provisional Return (FC-GPR); | Regulation 13.1(2) | Delay in filing form FC (GPR) after issue of shares. |
| Regulation 4(2) | Annual Return on Foreign Liabilities and Assets (FLA); | Regulation 13.1(3) | Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA). |
| Regulation 4(3) | Form Foreign Currency-Transfer of Shares (FC-TRS); | Regulation 13.1(4) | Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident. |
| Regulation 4(6) | Form LLP (I); | Regulations 13.1(7) and 13.1(8) | Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment / transfer of capital contribution or profit share between a resident and a non-resident (or vice-versa) in case of LLPs. |
| Regulation 4(7) | Form LLP (II); | ||
| Regulation 4(11) | Downstream Investment | Regulation 13.1(11) | Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP. |
Technical contraventions to be compounded with minimal compounding amount
As per RBI’s FAQs[1] whenever a contravention is identified by RBI or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide (i) whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice; (ii) whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or (iii) whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE). However, once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.
Nov 2020 Circular provides for regularizing such ‘technical’ contraventions by imposing minimal compounding amount as per the compounding matrix[1] and discontinuing the practice of giving administrative/ cautionary advice.
Public disclosure of compounding order
Compounding order by RBI can be accessed at the RBI website-FEMA tab-compounding orders[1]. In partial modification of earlier instructions issued dated May 26, 2016[2] it has been decided that in respect of the Compounding Orders passed on or after March 01, 2020 a summary information, instead of the compounding orders, shall be published on the Bank’s website in the following format:
| Sr. No. | Name of the Applicant | Details of contraventions (provisions of the Act/Regulation/Rules compounded)
(Newly inserted) |
Date of compounding order
(Newly inserted) |
Amount imposed for compounding of contraventions | Download order
(Deleted) |
It seems that the compounding order will not be available for download.
Conclusion:
The delegation of power is done for enhanced customer service and operational convenience. Revised format of disclosure of compounding orders will be more reader friendly. Delay in filing of forms under MPR Regulations on FIRMS portal is subject to payment of Late Submission Fees (LSF) as per Regulation 5. The payment of LSF is an additional option for regularising reporting delays without undergoing the compounding procedure.
Abbreviations used above:
- PROI: Person Resident Outside India;
- PRII: Person Resident In India;
- NRI: Non-Resident Indian;
- OCI: Overseas citizen of India;
FIRMS: Foreign Investment Reporting & Management System.
| Our other articles/channel can be accessed below:
1. Compounding of Contraventions under FEMA, 1999- RBI delegates further power to Regional Offices:
2. Other articles on FEMA, ODI & ECB may be access below: https://vinodkothari.com/category/corporate-laws/
3. You Tube Channel: |
[1] https://www.rbi.org.in/scripts/Compoundingorders.aspx
[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10424&Mode=0
[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10424&Mode=0
[1] https://m.rbi.org.in/Scripts/FAQView.aspx?Id=80 (Q. 12)
[1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10190
[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11253&Mode=0
[3] http://egazette.nic.in/WriteReadData/2019/213332.pdf
[4] https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=11723
[5]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIRS62545AA7432734B31BD5B59601E49AA6C.PDF
FDI Policy consolidated after 3 years: mismatches with NDI Rules remain
FEMA (Non-Debt Instruments) Rules, 2019 requires to be aligned for few sectors.
Bunny Sehgal | Associate | Vinod Kothari and Company
corplaw@vinodkothari.com
Introduction
The Department for Promotion of Industry and Internal Trade (‘DPIIT’) issued the Consolidated FDI Policy, 2020 (‘FDI Policy, 2020’) on October 28, 2020[1] in supersession of all press notes/ press release/ clarifications/ circulars issued by DPIIT. The FDI Policy, 2020, issued after 3 years[2], is effective from October 15, 2020. In case of any inconsistency or conflict between the provisions of FDI Policy 2020 and FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’), the relevant provisions of the NDI Rules will prevail.
FDI Policy is generally a compilation/ consolidation of all press notes/ press releases/ clarifications/ circulars issued by the DPIIT. The author has compared the FDI Policy, 2020 with the erstwhile policy, NDI Rules, and press notes issued by DPIIT in order to ascertain if there is any new insertion in the FDI Policy, 2020 or if the provisions deviate from NDI Rules and discussed the changes in this article.
1. Definition of E-commerce entity
Under the NDI Rules, E-commerce entity means a company incorporated under Companies Act 1956, or the Companies Act, 2013.
However, under the FDI Policy, 2020, an E-commerce entity means the following:
- a company incorporated under Companies Act 1956, or the Companies Act, 2013;or
- foreign company under section 2 (42) of the Companies Act, 2013; or
- an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.
The FDI Policy, 2020 elaborates the definition further to include foreign company and office, branch or agency in India owned or controlled by a person resident outside India. The changes have been brought in line with the definition of E-commerce entity provided in the Press Note 2 of 2018[3] issued by Department of Industrial Policy and Promotion effective from February 01, 2019.
2. FDI in Defence Sector
The provisions of the NDI Rules and the FDI Policy, 2020 with regard to the FDI sectoral cap and the necessary approvals for FDI in Defence Sector, have been provided as follows:
| Sr. No. | NDI Rules | FDI Policy, 2020 |
| 1. | Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951 and Manufacturing of small arms and ammunition under the Arms Act, 1959 | |
Sectoral Cap- 100%
|
Sectoral Cap- 100%
|
|
| Other Conditions ( Relevant extract) | ||
| 2. |
|
|
The limits provided in the FDI Policy, 2020 and other conditions were proposed vide press note 4 of 2020[4], and it will take effect from the date of FEMA notification. The FEMA notification in this regard is awaited, therefore, the amendment is not effective as on date.
3. FDI in Private Security Agencies
The provisions of the NDI Rules and the FDI Policy, 2020 with regard to the FDI sectoral cap and the necessary approvals for FDI in Private Security Agencies, have been provided as follows:
| Sr. No. | NDI Rules | FDI Policy, 2020 |
| 1. | Sectoral Cap- Upto 49% through Government approval only. | Sectoral Cap- Upto 74%
|
The sectoral cap for FDI in Private Security Agencies was revised as per the aforesaid limits vide Press Note 5 of 2016[5] dated June 24, 2016 effective on immediate basis. However, the NDI Rules continue to refer to old limits. The same is required to be aligned with FDI Policy, 2020
4. FDI in Asset Reconstruction Companies
The FDI Policy, 2020 provides following additional conditions for making foreign investment in Asset Reconstruction Companies (ARCs) as prescribed in Press Note 4 of 2016[6] dated May 6, 2016 effective on immediate basis:
- A person resident outside India can invest in the capital of ARCs registered with Reserve Bank of India, up to 100% on the automatic route.
- The total shareholding of an individual FPI shall be below 10% of the total paid-up capital.
However, the NDI Rules do not provide for the aforesaid conditions in this regard. While (i) above is self-explanatory and that express provision will not make much difference, the condition given in (ii) is crucial.
Conclusion
The intent and objective of the Government of India is to attract and promote FDI in order to supplement domestic capital, technology and skills for accelerated economic growth and development. With the enforcement of FDI Policy, 2020, some gaps have been observed in the provisions of NDI Rules and FDI Policy, 2020 which have been left over either inadvertently, or due to pending notification of the same. Although, the FDI Policy, 2020 itself provides for the superiority of the NDI Rules in case of any conflict between the provisions of the FDI Policy, 2020, and the NDI Rules, it is imperative for the authorities to look into to bring the uniformity in the provisions.
Other relevant material of interest –
[1] https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf
[2] The former Consolidated FDI Policy was issued in 2017.
[3] https://dipp.gov.in/sites/default/files/pn2_2018.pdf
[4] https://dipp.gov.in/sites/default/files/pn4-2020_0.PDF