Reserve Bank of India (RBI) has notified a new regulation for
governing foreign investment in India vide a notification dated 07
November 2017, i.e., Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident Outside India) Regulations,
2017 (New Regulation).
The New Regulation has introduced the following definitions:
The New Regulation provides a clarity in relation to FDI and FPI in case of a listed Indian company. Any investment made by a person resident outside India in a listed Indian company that is less than 10% of the post issue paid-up share capital (on a fully diluted basis) or less than 10% of the paid-up value of each series of capital instruments of a listed company will be regarded as FPI. However, if the investment increases to 10% or more, it will be reclassified as FDI.
(a) Private security agencies: The sectoral cap for private security agencies was increased to 74% (automatic up to 49% and government route beyond 49%) vide the Consolidated Foreign Direct Investment Policy, 2017. The New Regulation has reduced the sectoral cap from 74% to 49% under the approval route. The amendment has been made to align the regulation with the requirement mentioned under the Private Security Agencies (Regulation) Act, 2005.
(b) Commodities spot exchanges: A sectoral cap of 49% under the automatic route has been specified for investments in commodities spot exchanges. Guidelines for investments will be prescribed by the Government in due course.
The Old Regulations provided that the rate of dividend on preference shares or convertible preference shares must not exceed a limit of 300 basis points over the prime lending rate of State Bank of India. This cap on payment of dividend on preference shares has been removed under the New Regulation.
The timeline for the issue of capital instruments has been changed from 180 days to 60 days from the date of receipt of consideration. This change has aligned the New Regulation with the requirements of the Act. The New Regulation further provides that in case of non-issuance of capital instruments within a period of 60 days of receipt of consideration, it shall be refunded by outward remittance to the persons concerned.
Under the old
regime, the onus of submitting Form FC-TRS in case of a transfer
was on the transferor/transferee, resident in India. In terms of
the New Regulation, in addition to the transferor/transferee
resident in India, the onus of reporting the transfer of capital
instruments is also on the person resident outside India holding
capital instruments on a non-repatriable basis.
Regulations allowed a non-resident Indian (NRI)
or an overseas corporate body (OCB) to transfer
the capital instruments held by them to only another NRI or OCB.
The New Regulation has, however, permitted transfers by an NRI or
OCB to any person resident outside India subject to the prescribed
The New Regulation has amended the definition of downstream investment to include investment by a limited liability partnership (LLP) or any other form of investment vehicle in a downstream Indian company or LLP. Accordingly, the definition of downstream investment now includes investment received by an Indian company or LLP from another Indian company or LLP or any investment vehicle made in accordance with the New Regulation.
(a) The New Regulation clarifies that the total foreign investment shall be calculated on a fully diluted basis. The term fully diluted basis has been defined to mean the total number of shares that would be outstanding if all possible sources of conversion are exercised.
(b) The valuation of capital instruments required to be done as per internationally accepted pricing methodology on an arms length basis of an unlisted Indian company can now also be done by a practicing Cost Accountant.
(c) In case of a merger, amalgamation, demerger or any other similar arrangement, the Old Regulations provided that the transferee company may issue shares to the shareholders of a transferor company resident outside India, subject to the prescribed conditions. Indian companies are now permitted to issue any capital instruments to the existing holders of the transferor company resident outside India.
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