External Commercial Borrowings (ECB) Framework
– Heta Mehta, Senior Executive | corplaw@vinodkothari.com
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Open in new tab SWAGAT to foreign branches or offices in India: RBI proposes draft regulations on such establishments
– Team Corplaw | Corplaw@vinodkothari.com
As a part of its efforts to rationalise the regulations for establishment of a place of business in India by overseas entities[1], RBI has issued Draft Foreign Exchange Management (Establishment in India of a branch or office) Regulations, 2025. The proposals primarily aim to enable delegation of more powers to AD banks and reduction of compliance burden, thereby further enhancing the ease of doing business in India.
As against the extant Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, as updated in Master Direction – Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities, the classification of foreign establishments have been limited to (a) branch and (b) office.
Read more →RBI rationalises Guarantee regulations
Introduces principle-based regulatory approach and reporting requirements
– Vinita Nair & Harshita Malik | corplaw@vinodkothari.com
– Updated on January 13, 2026
Effective January 10, 2026, FEMA (Guarantees) Regulations, 2026 (‘Regulations, 2026’) came into force repealing the 26-year-old FEMA (Guarantees) Regulations, 2000 (‘Erstwhile Regulations’), moving to principle based requirements and introducing comprehensive reporting of all requirements for all guarantees . Regulations, 2026 apply to guarantee arrangements involving a surety (person who gives the guarantee), a principal debtor (a person in respect of whose default the guarantee is given) and a creditor (means a person to whom the guarantee is given) where the Person Resident In India (‘PRII’) provides/ avails guarantee to/ from a Person Resident Outside India (‘PROI’). The meaning of guarantee1 includes counter guarantees and (based on stakeholders feedback) also a guarantee for securing a portfolio of debt, obligations or other liabilities.
Regulations, 2026 comprises of 8 regulations covering the general Prohibition (Reg 3), Exemptions for certain transactions by AD Bank and (based on stakeholders feedback) guarantees extended in terms of overseas investment regulations (Reg 4), Permission to act as a surety or a principal debtor (Reg 5), Permission to obtain a guarantee as a creditor (Reg 6), Reporting Requirements (Reg 7) and Late Submission fee for delayed reporting (Reg.8). These have been notified based on the feedback received on the Draft FEMA (Guarantees) Regulations, 2025 (‘Draft Regulations’) issued in August 2025.
Onus of compliance [Reg. 3]
The Erstwhile Regulations placed the onus on the PRII giving a guarantee or a surety in relation to a debt, obligation or other liability owed to or undertaken by PROI. Regulations, 2026 additionally extends the onus even to a PRII who is the party to a guarantee (surety or creditor or a principal debtor) where any of the other party is a PROI.
Exemptions under Regulations, 2026 [ Reg 4]
- Guarantees by AD Bank’s branch outside India or in IFSC (based on stakeholders feedback), unless any of the other parties to guarantee is a PRII;
- Guarantees by AD Bank in the nature of Irrevocable Payment Commitment (IPC) issued as a custodian bank for a registered FPI on behalf of an authorised central counterparty in India, considering the same is treated as a financial guarantee in terms of RBI prudential norms for commercial banks.
- Guarantees provided in accordance with FEMA (Overseas Investment) Regulations 2022 (based on stakeholders feedback) – considering those are governed and reported under a separate framework altogether.
Conditions to act as Surety/ Principal Debtor [Reg. 5]
A PRII can give a guarantee or be the principal debtor if the following two conditions are met:
- Condition 1: The underlying transaction for which the guarantee is being given or arranged is NOT prohibited under FEMA; and
- Condition 2: Surety and principal debtor must be eligible to lend to and borrow from each other under FEMA (Borrowing & Lending) Regulations, 2018 (clause earlier referred to ‘resultant transaction’ and has been modified based on stakeholders feedback). It is intended that at the time of issuance of guarantee itself, the surety and the principal debtor shall ensure that they are eligible to lend and borrow to each other as per Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Compliance with other attendant conditions, such as cost, maturity, etc. for borrowing and lending is not envisaged.
However, Condition 2 provides for three exceptions (listed below in the table):
| Nature of guarantee | Given by | In favor of | Condition for exemption |
|---|---|---|---|
| Guarantees by AD bank backed by counter guarantee or collateral (based on stakeholders feedback) | AD Bank | PROI | Covered by counter-guarantee OR 100% cash collateral in the form of deposit from PROI |
| Guarantee by agents of foreign Shipping/Airline company | Agent in India | Foreign Shipping/Airline Co. | In connection with its obligation/ liability owed to statutory/Government authority in India |
| Both Indian Parties | PRII | PRII | Both surety & principal debtor are PRIIs |
Further, the prohibition added in the Draft Regulations in line with RBI Circular of March 13, 2018 disallowing AD Bank from giving a Letter of Comfort or a Letter of Undertaking is not expressly covered in Regulations, 2026. However, the circular of March 2018 does not seem to have been repealed by RBI either. Accordingly, the prohibition seems to continue.
Permission to obtain guarantee as a creditor [Reg. 6]
Explicit permission given to PRII creditors to obtain guarantees in its favor where both principal debtor and surety are PROIs, where the underlying transaction is not prohibited under the FEMA.
Reporting requirements [Reg. 7 and 8]
The Erstwhile Regulations did not provide for any reporting requirements. Guarantees provided as part of ECB or in favor of overseas subsidiaries were covered under the reporting made under respective regulations. Regulations, 2026 provide for detailed reporting requirements, with RBI having the right to put the information in public domain.
Who is to report: Regulations, 2026 mandate reporting of guarantees through the AD Banks. Reporting is required to be made by the
a) Resident surety; or
b) Principal debtor who arranged the guarantee, where surety is PROI; or
c) Creditor – where both surety and principal debtor are PROI or where the creditor has arranged the guarantee.
In case of more than one surety/ principal debtor/ creditor to the same guarantee, any of them can be designated to report that guarantee (based on stakeholders feedback).
To whom: To the AD Bank
What is to be reported: Guarantees covered in Regulations, 2026 – (a) issuance of guarantee, (b) any subsequent change in guarantee terms, namely – guarantee amount, extension of period or pre-closure, and (c) invocation of guarantee, if any,
Format: Form GRN (format provided at Annex to the Regulations, 2026).
One of the instructions for filing form GRN states that change of guarantees issued prior to coming into effect of these regulations i.e. January 10, 2026 shall be reported as a fresh issuance of guarantee from the date of modification. This seems to indicate that guarantees outstanding as on January 10, 2026 need not be reported unless there is a modification. In that case, an invocation of an existing guarantee may also not be required to be reported unless there is any modification which has been reported to the AD Bank under Regulations, 2026.
Further, quarterly reporting on issuance of guarantee for Trade Credit is being discontinued from quarter ending March 2026.
Periodicity and timeline: On a quarterly basis, within 15 days from the end of the respective quarter (revised to periodic basis from ‘as and when basis’ based on stakeholders feedback). Draft regulations provided for reporting within7 days from the date of issuance/ aforementioned change/ invocation of such guarantee
Further, AD Bank to onward report to RBI within 30 days from end of quarter.
Late Submission fee: Rs. 7,500 + (0.025% × A × n) rounded up to nearest hundred, where:
- A = amount involved in the delayed reporting in INR; and
- n = years of delay rounded-upwards to the nearest month and expressed up to 2 decimal points.
Amendments to ECB Master Directions
Deletion of Para 17.2 of the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (ECB Master Directions) dealing with the quarterly reporting requirement on data on bank guarantees for trade credits furnished by AD Bank.
Deletion of guarantee related provisions in Part III dealing with Structured Obligations: Para 19 dealing with terms and conditions for Non-resident guarantee for domestic fund based and non-fund based facilities and Para 20 dealing with terms and conditions for Facility of Credit Enhancement by eligible non-resident entities to domestic debt raised through issue of capital market instruments.
Amendments to other Master Directions
Master Directions – Export of Goods and Services, Master Directions – Import of Goods and Services , Master Direction – Other Remittance Facilities – Deletion of provision relating to issue of various guarantee in relation to export, import transactions covered under Erstwhile Regulations as Regulations, 2026 move to a principal based regime.
Master Direction – Reporting under Foreign Exchange Management Act, 1999 inserting Form GRN in relation to reporting of guarantees .
Conclusion
The Regulations, 2026 is certainly a welcome change, introducing principle-driven framework, expanded scope (counter-guarantees, portfolio guarantees), and simplified quarterly reporting. Specific requirements provided under ECB norms, ODI rules, Borrowing and lending regulations etc. shall continue to be complied while undertaking the transaction and the existing arrangements should be reviewed for new quarterly reporting obligations in case of modifications.
You may read more at our Resource centre on FEMA
- including a ‘counter guarantee’ means a contract, by whatever name called, to perform the promise, or discharge a debt, obligation or other liability (including a portfolio of debts, obligations or other liabilities), in case of default by the principal debtor ↩︎
RBI amends FEMA norms to promote usage of INR in global markets
February 03, 2025
-Prapti Kanakia, Manager & Anjali Singh, Executive | corplaw@vinodkothari.com
Read More:
FEMA facilitates acquisition of foreign entity by Indian companies through cross border swaps
RBI revamps Master Directions on Compounding under FEMA
Powers of RBI Officers enhanced for compounding FEMA offences
Downstream investment to be treated at par with FDIs
Introduction
The Master Direction on Foreign Investment in India, recently updated on January 20, 2025, goes beyond a mere consolidation of the recent amendments in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’), providing clarifications in several areas of legislative silence. One of the key areas of clarification include the rules around downstream investments.
In this note, we have discussed downstream investment through stock deals and other significant clarifications provided in the Master Direction.
Background
Rule 6(a) of the NDI Rules deals with the investment by a person resident outside India (‘PROI’) in the equity instruments of an Indian company. The said rule refers to Schedule I, which, amongst others, specifies the modes of payment of consideration. Prior to the FEM (Non-Debt Instruments) (Fourth Amendment), Rules, 2024 dated August 16, 2024 (“Fourth Amendment Rules”), the Schedule contained an enabling provision for Indian companies to issue its equity instruments to PROI by way of swap of equity instruments. Since the term “equity instruments”, as defined under Rule 2(k) of Principal NDI Rules, means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company, the provision permitting share swaps was read narrowly to refer to swap of shares of an Indian company against that of another Indian company only.
However, pursuant to the Fourth Amendment Rules, the Schedule was further amended to expressly provide for the swap of equity capital, as defined under rule 2(1)(e) of Foreign Exchange Management (Overseas Investment) Rules, 2022. The same is defined as “equity shares or perpetual capital or instruments that are irredeemable or contribution to non-debt capital of a foreign entity in the nature of fully and compulsorily convertible instruments.”
Downstream investment, on the other hand, is governed by the provisions of Rule 23 of the NDI Rules. While the said rule specified certain requirements to be complied with in the context of downstream investment, including the sources through which funds can be brought in for the purpose of such investments, the rule neither explicitly provided for the share swaps as a permitted mode of payment, nor contained any reference to Schedule I of the NDI Rules. As a result there was uncertainty among industry stakeholders on permissibility of share swaps as a form of consideration in case of downstream investment.
Meaning of Downstream Investment
The explanation to Rule 23 (also contained in Para 9.1.13 of the Master Direction) states that:
Downstream Investment is an investment made by an Indian entity which has received foreign investment or an Investment Vehicle in the equity instruments or the capital, as the case may be, of another Indian entity.
In other words, when an Indian entity owned or controlled by PROI [commonly referred to as a Foreign Owned and Controlled Entity (FOCC)] makes investments in the equity instruments/ capital of an Indian entity, such an investment will be considered as downstream investment for the PROI. Such arrangements enable PROI to hold investment in other Indian entities indirectly, thus, considered as an indirect foreign investment. As a result, the restrictions, prohibitions and limitations as applicable to direct foreign investments will be applicable at the time of downstream investment as well. For better understanding, refer to the figure below:
Guiding principle on downstream investment: what cannot be done directly, shall not be done indirectly
The recent updates in the Master Directions provide for the guiding principles of downstream investments, thereby clarifying that all permissions and prohibitions vis-à-vis direct foreign investment under the NDI Rules will be applicable to indirect foreign investment (i.e. downstream investment) as well.
Para 9 of the Recent Master Direction reads as below:
“The guiding principle of the downstream investment guidelines is that “what cannot be done directly, shall not be done indirectly”. Accordingly, downstream investments which are treated as indirect foreign investment are subject to the entry routes, sectoral caps or the investment limits, as the case may be, pricing guidelines, and the attendant conditionalities for such investment as laid down in the NDI Rules.”
Giving reference to above guiding principles, the Master Directions explicitly refers to the permissibility of the arrangements which are available for direct investment such as investment by way of swap of equity instruments/equity capital, payment arrangements/mechanism as per Rule 9(6) of the Rules etc, for the purpose of downstream investment as well.
Implication of above clarification
The above clarification has paved a way for Foreign Owned or Controlled entities (FOCC) to make further investments in Indian entities by way of swapping equity capital of foreign companies held by it in addition to other sources as already available. This arrangement of swapping of securities is known as a stock deal.
Previously, for making downstream investment, an FOCC was allowed to raise fresh funds from abroad by way of issue of securities including non-convertible debentures or by utilising internal accruals such as profits after tax. For more clarity refer to the table below:
| Sources of making investment by FOCC in another Indian entity | Position prior to the clarification | After clarification |
|---|---|---|
| Internal accruals (i.e., profits transferred to reserve account after payment of taxes) | Allowed | Allowed |
| Fresh funds from abroad including issue of NCD | Allowed | Allowed |
| Swap of equity instruments/ capital | No express provision | Allowed |
| Using funds borrowed in the domestic markets | Not allowed | Not allowed |
Other conditions w.r.t downstream investment in light of the guiding principle
As per the guiding principle on downstream investments as discussed above, an Indian entity which has received indirect foreign investment is subject to permissions and prohibitions as applicable to direct foreign investment under NDI Rules. Further, the onus of ensuring such compliances are on the FOCC making such investments, and not on the Indian investee entity receiving such indirect FDI.
- Investment from land border sharing countries
In order to curb opportunistic takeovers/ acquisitions of Indian companies due to COVID-19 pandemic, the Government of India restricted investment from countries sharing land borders with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, by way of issue of Press Note-3. As a result, any foreign direct investment from such countries would be permitted with prior approval of the Government of India in permissible sectors.
This will be applicable in case of investment by FOCC as well, where such FOCC, in turn, has received investment from such countries as discussed above.
- Deferred payment arrangements
Similarly, the facility of making deferred payment of up to 25% in case of transfer of equity instruments between PROI and Person Resident in India (PRI) will also be applicable in case of downstream investment. This is, subject to the compliance with the conditions as laid down in Rule 9(6) of the NDI Rules.
The Master Directions further state that a transaction intended to be undertaken using above arrangement(s) shall require the share purchase/transfer agreement to contain the respective clause and related conditions for such arrangement.
- Subsequent classification as downstream investment
Where an Indian entity (i.e., investor) at the time of making further investment in another Indian entity (i.e., investee) was not an FOCC at the time of investment, but subsequently becomes an FOCC, then such investment in another Indian entity would need to be reclassified as downstream investment from the date when investor entity becomes FOCC. Consequently, such downstream investment shall be in compliance with the applicable entry route and sectoral cap compliances and shall be required to be reported by the investor entity within 30 days from the date of such reclassification in form DI.
- Valuation requirement
As per para 8.4 of the Recent Master Direction, in case of swap of equity instruments, irrespective of the amount, valuation will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
- Downstream Investment by NRI/OCI on non-repat. basis to be treated as domestic investment
The investments made by NRIs/OCIs on non-repatriation basis is treated as deemed domestic investment. Accordingly, an investment made by an Indian entity which is owned and controlled by a Non-Resident Indian or an Overseas Citizen of India including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a Non-Resident Indian or an Overseas Citizen of India, on a non-repatriation basis in compliance with Schedule IV of these rules, shall not be considered for calculation of indirect foreign investment.
To know more about foreign investment, check out our YouTube repository on:
- Overview of Foreign Direct Investment
- Understanding the Downstream Investment
- Overview of Overseas Investment Rules
Powers of RBI Officers enhanced for compounding FEMA offences
IFSC Gateway to Global Access for Indian unlisted companies
LEAP to listing: India permits direct listing of shares overseas through IFSC
MCA & MOF notify rules for the same
– Vinita Nair & Prapti Kanakia | corplaw@vinodkothari.com
January 25, 2024 (Updated on August 31, 2024)
Indian companies were permitted to raise funds from overseas either pursuant to issue of depository receipts listed overseas or having the non-residents subscribe to issuances made in India or by way of borrowing overseas. As an initiative to provide an avenue to access global capital markets, GoI had announced the decision to ease the raising of foreign funds in order to boost foreign investment inflows, unlock growth opportunities, and offer flexibility to Indian companies to raise funds. Consequently, an enabling provision for direct listing of prescribed class of securities on permitted stock exchanges in permissible foreign jurisdictions was inserted vide Companies (Amendment) Act, 2020 in Section 23 of Companies Act, 2013 (‘CA, 2013’), that deals with permissible modes of issue of securities, vide notification dated September 28, 2020, and made effective from October 30, 2023. Thereafter, the Ministry of Corporate Affairs (‘MCA’) notified Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (‘LEAP Rules’) effective from January 24, 2024. As listing of shares abroad will result in raising funds from Persons Resident Outside India (PROI), Ministry of Finance (‘MoF’) notified FEMA (Non-Debt Instruments) Amendment Rules, 2024 amending FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) with effect from January 24, 2024. SEBI is also expected to roll out the operational guidelines for listed companies to list their equity shares on permitted stock exchanges.[1]
Additionally, FAQs on direct listing scheme (FAQs) have also been rolled out on January 24, 2024. Further, two of the key recommendations of the working group report on Direct Listing of Listed Indian Companies on IFSC Exchanges submitted in December 2023 were to notify the rules under Section 23 (3) and (4) of CA, 2013 and notify necessary amendments in NDI Rules to permit cross-jurisdiction issuance and trading of equity shares of Indian companies on IFSC exchanges.
Presently, both the LEAP Rules as well as NDI Rules have notified International Financial Services Centre in India (‘Gift City’) as the permissible jurisdiction and India International Exchange and NSE International Exchange (‘IFSC Exchanges’) as the permissible stock exchange. International Financial Services Centres Authority (‘IFSCA’) had issued the IFSCA (Listing) Regulations, 2024 effective August 29, 2024 (‘IFSC Regulations’) however, in the absence of enabling provision under CA, 2013 and NDI Rules, Indian companies were unable to undertake listing of securities abroad.
In this article we provide an overview of the regulatory regime and deal with the procedural aspect.
Regulatory regime for listing securities in IFSC
Chapter X of the NDI Rules permits investment by a permissible holder subject to conditions specified in Schedule XI. Schedule XI inter-alia provides the permissible mode of issuance, eligibility conditions for a permissible holder and Indian companies, obligations of the companies and requirements relating to voting rights and pricing.
LEAP Rules prescribe the eligibility norms for unlisted public companies and procedural aspects in relation to timeline and form for filing the prospectus, complying with Indian Accounting Standards post listing etc.
The IFSC Regulations provide the general conditions w.r.t the principles and eligibility criteria for issuer, specific eligibility criteria for IPO, procedural requirements in case of an entity freshly listing on IFSC exchanges (Chapters I, II, III) and also norms for secondary listing of specified securities (Chapter V). Chapter VI deals with listing of special purpose acquisition companies (SPAC). Comparison of the requirements under IFSC Regulations vis-a-vis under ICDR Regulations is enclosed as Annexure 1.
Mode of Listing
Companies can raise the funds either by issuing fresh capital or by offering the existing shares. In the latter case, the existing shareholders tender their shares. Both the methods are allowed under LEAP Rules & NDI Rules for listing the equity shares on IFSCA exchanges.
Figure 2: Mode of listing
Para 2 of Schedule I to NDI Rules prohibits certain sectors for investment, meaning the company engaged in prohibited sector is not allowed to raise foreign funds[2]. The same conditions are applicable in case of listing in IFSC either by way of fresh issuance/offer for sale. Eg. Nidhi company is a prohibited sector and therefore the nidhi company cannot list its equity share in IFSC.
Further, Schedule I to NDI Rules prescribes sectoral caps which are required to be complied by the public Indian company at the time of direct listing. Refer Cap on Foreign Funds for further details.
Companies ineligible to list in IFSC
NDI Rules, LEAP Rules, and IFSC Regulations provide certain eligibility criteria for companies intending to list the specified securities on permissible stock exchanges. The same are discussed below:
Companies ineligible under LEAP Rules
LEAP Rules are applicable to both unlisted public companies and listed public companies, however, the eligibility criteria under LEAP Rules are applicable to unlisted public companies only. Rule 5 of LEAP Rules provides that the following companies shall not be eligible for listing the equity shares in IFSC;
Figure 3: Companies ineligible under LEAP Rules
Companies ineligible under NDI Rules
Para 3 of Schedule XI to NDI Rules provides the eligibility criteria for direct listing. Para 3(1) & 3(3) is applicable to unlisted public companies and para 3(1) & 3(2) is applicable to listed companies. The eligibility conditions are based on the type of issuance i.e. fresh issuance or offer for sale.
In case of fresh issuance, the following companies are ineligible:
Figure 4: Companies ineligible under NDI Rules, in case of fresh issuance
Most of the conditions above are similar to those provided in Reg. 5, 61, 102, etc. of SEBI (ICDR) Regulations, 2018 (‘ICDR Regulations’) except for the ineligibility arising on account of inspection or investigation under CA, 2013. Chapter XIV of CA, 2013 deals with the requirements relating to inspection, inquiry, and investigation. The Registrar of Companies is empowered to carry out inspection in terms of Section 206 of CA, 2013 and on the basis of the outcome of the same or for other reasons specified in Section 210, the Central Government may order an investigation. In case of inspection or investigation, it is likely that the same may continue for a longer period without any tangible outcome. In such cases, this restriction will act as a deterrent for the companies eligible otherwise. Additionally, reg. 5 (2) of ICDR Regulations, an issuer is not eligible to make an initial public offer if there are any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer. There is no such similar restriction under IFSC Regulations.
The following companies are ineligible, in case of offer for sale by existing shareholders:
Figure 5: Companies ineligible under NDI Rules, in case of offer for sale
Companies Ineligible under IFSC Regulations
Companies incorporated in India/IFSC/foreign jurisdiction are allowed to list on IFSC Exchanges, however, the issuer, any of its promoters, controlling shareholders, directors or existing shareholders offering shares should not be
- debarred from accessing the capital market; or
- a wilful defaulter; or
- a fugitive economic offender
Further, Regulation 9 of IFSC Regulation prescribes certain eligibility criteria for listing such as operating revenue, minimum market capitalization, PBT, etc. (Refer our article IFSC Gateway to Global Access for Indian unlisted companies to understand the conditions in detail). Hence, the entities that are not ineligible as per LEAP Rules, NDI Rules, and IFSCA Regulations and fulfilling the eligibility criteria of IFSC Regulation can list its equity shares in IFSC Exchanges.
Permissible holder
Para 2 of Schedule XI to NDI Rules provides the eligibility criteria for the permissible holders of equity shares listed on permissible stock exchanges. Any Person Resident Outside India (‘PROI’) can be a permissible holder. Thus, an Indian resident cannot hold such shares, however a non-resident Indian can hold such shares (FAQ no. 15 & 16). The said conditions are also applicable to a beneficial owner.[3]
Where a holder is a citizen of a country which shares land border with India, or an entity incorporated in such a country, or an entity whose beneficial owner is from such a country, they can hold equity shares of such a public Indian company only with the approval of the Central Government.
To ensure that the investor is aware of the above conditions of the permissible holders, the Indian company is required to indicate the same in its offer document issued while raising funds in Gift City.
Voting rights on such equity shares will be exercised directly by the permissible holder or through their custodian pursuant to voting instruction only from such permissible holder.
As per RBI Master Directions – Liberalized Remittance Scheme (LRS) investments in IFSCs in securities except those issued by entities or companies in India (outside IFSC) were permitted. RBI Circular dated July 10, 2024 permits availing of financial services or financial products[4] (which inter alia includes securities)within IFSC. However, this cannot be construed to override the eligibility of ‘permissible holder’ prescribed under NDI Rules.
Investment Limit for permissible holder
A permissible holder can invest upto the limits prescribed for foreign portfolio investors i.e. less than 10% of the total paid-up equity capital on a fully diluted basis. That means one single investor can hold less than 10% of the equity share capital on a fully diluted basis of the public Indian Company.
Manner of Purchase/Sale
A permissible holder is allowed to pay the purchase/subscription consideration either to a bank account in India or deposited in a foreign currency account of the Indian company held in accordance with the FEM (Foreign currency accounts by a person resident in India) Regulations, 2015, as amended from time to time.
In case of a sale, the consideration may be remitted out of India or can be credited to the bank account of the permissible holder maintained in accordance with FEM (Deposit) Regulations, 2016 i.e. NRO/ NRE/ FNCR/ SNRR account.
Cap on Foreign Funds
Schedule I to NDI Rules provides the sectoral caps, i.e. the maximum foreign investment permissible in a particular sector. The said conditions are to be complied in case of listing on permitted stock exchanges as well since, listing on IFSC will result in raising funds from PROI. Accordingly, amounts offered to PROI in permissible jurisdiction along with equity shares held in India by PROI should be compliant of the sectoral cap. The aggregate amount held by PROI should not exceed the limits prescribed.
Further, wherever Government approval is required under Schedule I, the same shall be obtained while raising funds from permitted foreign exchange. Eg. in case of print media, foreign investment upto 26% is permitted under government route, therefore a company engaged in print media business can raise only upto 26% from permitted stock exchanges after obtaining requisite approval.
Also, the company has the option of receiving the funds either in the bank account maintained in India or in the foreign currency account maintained outside India. Indian companies are allowed to keep funds in the foreign currency account maintained with the Bank outside India, until its utilization or repatriation to India.
Pricing of Equity Shares
Para 6 of Schedule XI to NDI Rules provides for pricing of equity shares to be listed on the permitted stock exchange. LEAP Rules does not prescribe any pricing conditions.
Figure 6: Pricing of equity shares
Other actionable
- The unlisted public company is required to file the prospectus in form LEAP-1 with ROC within a period of seven days after the same has been finalised and filed in the permitted exchange.
- Post listing, the company will be required to prepare the financial statements as per Ind AS in addition to any other accounting standard, if applicable.
- The Indian company will be required to report to RBI through AD Banks in form LEC (FII) about the purchase/subscription of equity shares listed on IFSC Exchanges.[5]
Direct listing overseas v/s depository receipts
Issuance of depository receipts is governed by Depository Receipt Scheme, 2014 read with FEMA NDI Rules and SEBI’s framework for issue of depository receipts. The regime is different from the issue of ADR/ GDR and listing on overseas exchanges.
- While the Scheme provided for any Indian company being eligible to issue depository receipts, SEBI restricted the eligibility to issue only by ‘a company incorporated in India and listed on a recognised stock exchange in India’. Therefore, unlisted entities are not eligible to issue depository receipts.
- Mode of listing of DRs are similar to present regime i.e. fresh issuance or OFS of permissible securities.
- There are 8 permissible jurisdictions for ADR/GDR issuance[6] as compared to just IFSC in case of direct listing.
- The concept of permissible holder for depository receipts is similar to permissible holder in the context of direct listing (discussed above) such that residents are not eligible to hold the same even as a beneficial owner. In case of depository receipts, even NRIs are ineligible to invest. However, as clarified by SEBI vide circular dated December 18, 2020 issue of DRs to NRIs is permitted pursuant to share based employee benefit schemes which are implemented by a company in terms of SEBI (Share Based Employee Benefits) Regulations 2014[7] and pursuant to a bonus issue or a rights issue;
- The norms relating to pricing and voting rights are also on similar lines in both cases.
Status after listing
In case of direct listing, Indian companies would be listing its ‘equity shares’ and/or ‘convertible securities’. The Companies Act, 2013 defines the term ‘listed company’ as a company which has any of its securities listed on any recognised stock exchange. However, clause (c) of Rule 2A of the Companies (Specifications of Definitions Details) Rules, 2014 (‘SDD Rules’) provides that public companies which have not listed their equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Act shall not be considered as a listed company.
Therefore, the status of an unlisted public company will not change upon direct listing and consequently, the additional compliances as applicable to a listed company under CA, 2013 will not apply to such company in view of express carve-out in terms of the SDD rules.
However, every Indian company getting its securities listed on stock exchanges in IFSC will be required to comply with Chapter XII[8] of the IFSC Regulations dealing with listing obligations and disclosure requirements, as applicable.
Minimum Public Shareholding Requirement
Securities Contracts (Regulation) Rules, 1957 (‘SCR Rules’) mandates listed companies in India to have a minimum public shareholding (MPS) of atleast 25% of each kind of equity shares.
On the requirement for minimum offer and allotment to public, Ministry of Finance vide notification dated 28th August, 2024, amended Rule 19 of SCR Rules prescribing a minimum of 10% irrespective of the post issue paid up capital (as opposed to 25% applicable to listed entities in India) for companies intending to list their securities on recognized stock exchanges in IFSC. Further, the continuous listing requirement in Rule 19A has also been amended prescribing MPS requirement of atleast 10%. In case it falls below 10% at any time, the company will be required to bring the public shareholding to 10% within a maximum period of 12 months from the date of such fall[9].
In this regard, the working group committee suggested that the public holding fulfilling the definition of public shareholding as per SCR Rules[10] should be considered towards MPS and such requirements should be complied in both jurisdictions separately to ensure free float in both jurisdictions. Basis the recommendations, the working group committee recommended making appropriate changes in the SCR Rule. In view of the aforesaid amendment, it seems that MPS norms are required to be separately maintained.
Tax incentives available to permissible holders
Non-residents i.e. permissible holders are exempt from the applicability of capital gains tax in case of transfer of foreign currency denominated equity shares of a company where the consideration is payable in foreign currency pursuant to Section 47(viiab) of Income Tax Act, 1961 read with Notification dated 5th March, 2020. Also, Securities Transaction Tax, Commodities Transaction Tax, and stamp duty in respect of transactions carried out on IFSC exchanges is exempt.
Conclusion
The initiative is quite encouraging and will benefit India Inc. in fundraising, however, the ineligibility on account of pending inspection/investigation needs to be revisited. The requirements post listing, as per IFSC Regulations are also numerous, several of them being on similar lines as provided under Listing Regulations.
[1] As per the press release by PIB.
[2] Prohibited sectors include- Lottery business, Gambling and betting, Chit funds, Nidhi company, Trading in TDR, (a) Real estate business or construction of farm houses, Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes, Atomic energy, Railway operations, Foreign technology collaborations in any form for lottery business and gambling and betting activities.
[3] Beneficial owner as defined as per proviso to sub-rule (1) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005
[4] “financial product” means—(i) securities; (ii) contracts of insurance; (iii) deposits; (iv) credit arrangements; (v) foreign currency contracts other than contracts to exchange one currency for another that are to be settled immediately; and (vi) any other product or instrument that may be notified by the Central Government from time to time.
[5] Inserted vide FEM (Mode of Payment and Reporting of NonDebt Instruments) (Amendment) Regulations, 2024
[6] 1. United States of America – NASDAQ, NYSE 2. Japan – Tokyo Stock Exchange 3. South Korea – Korea Exchange Inc. 4. United Kingdom excluding British Overseas Territories- London Stock Exchange 5. France – Euronext Paris 6. Germany – Frankfurt Stock Exchange 7. Canada – Toronto Stock Exchange 8. International Financial Services Centre in India – India International Exchange, NSE International Exchange.
[7] The onus of identification of NRIs holders, who are issued DRs in terms of employee benefit scheme, would lie with the listed company. The listed company is required to provide the information of such NRI DR holders to the designated depository for the purpose of monitoring of limits.
[8] Part A: General Obligations; Part B: Companies with Specified Securities Listed on Recognised Stock Exchanges as a Primary Listing and Part C: Secondary Listing of Specified Securities.
[9] Manner of achieving MPS has been prescribed vide SEBI Circular dated February 3, 2023.
[10]Rule 2(e) of SCR Rules defines public shareholding as equity shares of the company held by public including shares underlying the depository receipts if the holder of such depository receipts has the right to issue voting instruction and such depository receipts are listed on an international exchange in accordance with the Depository Receipts Scheme, 2014.
Provided that the equity shares of the company held by the trust set up for implementing employee benefit schemes under the regulations framed by the Securities and Exchange Board of India shall be excluded from public shareholding.
Provided that the equity shares of the company held by the trust set up for implementing employee benefit schemes under the regulations framed by the Securities and Exchange Board of India shall be excluded from public shareholding.