Central government notification dated 17th October 2019 for new rules called the Foreign Exchange Management (Non-debt Instruments) Rules, 2019
Introduction –
On 17 October 2019, the Central Government notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) and the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Debt Instruments) Regulation, 2019 (DI Regulations) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (collectively referred to as NDI and DI norms).
The NDI and DI norms replace the existing Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO), and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (ATIP).New definitions have been added in the NDI rules, 2019 which are explained below –
Debt and non-debt instruments – As per the definition, instruments mentioned below are to be identified as debt & non-debt instruments. All other instruments not covered below are deemed to be debt instruments.
Debt Instruments
Non-Debt Instruments
Corporate bonds
All investments in equity in incorporated entities (public, private, listed and unlisted);
Government bonds
capital participation in Limited Liability Partnerships (“LLP”)
Borrowings by Indian firms through loans
all instruments of investment as recognized in the foreign direct investment (“FDI”) policy as notified from time to time
All tranches of securitization structure which are not equity tranche
investment in units of Alternative Investment Funds, Real Estate Investment Trust and Infrastructure Investment Trusts
Depository receipts whose underlying securities are debt securities
investment in units of mutual funds and Exchange-Traded Fund which invest more than fifty per cent in equity
the junior-most layer (i.e. equity tranche) of securitization structure
acquisition, sale or dealing directly in immovable property
contribution to trusts
depository receipts issued against equity instruments
Hybrid securities – means hybrid instruments such as optionally or partially convertible preference shares or debentures and other such instruments as may be specified by the Central Government from time to time, which can be issued by an Indian company or a trust to a person resident outside India.
Equity Instruments – The expressions “equity instruments” means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company. The nomenclature of ‘capital instruments’ has been replaced with the term ‘equity instruments’ throughout the NDI Rules.
Investment Vehicle – The definition of Investment Vehicle has been modified. As per the new definition, any mutual fund investing more than 50% in equity will also be considered as an Investment Vehicle.
Key changes from the earlier Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO) –
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2018 had amended the sectoral cap and entry route for single brand product retail trading to 100% under automatic route. These amendments had further liberalized sectoral conditions in relation to this sector. However, the NDI Rules have restored the position as was prevalent in the Old FEMA prior to the amendment in 2018, with the entry route being automatic for foreign investment up to 49% and approval route beyond 49%.
Old FEMA provided for an individual limit of 10% and aggregate limit of 24% of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company. In terms of the NDI Rules with effect from 1 April 2020, the aggregate FPI (Foreign Portfolio Investment) limit shall be the sectoral caps applicable to the Indian company as set out in Schedule I of the NDI Rules.
The aggregate limit as per sectoral caps may be decreased by the Indian company (prior to 31 March 2020) or increased with the approval of its board of directors and its shareholders by a special resolution. However, once increased, the limits cannot be reduced.
The aggregate limit with respect to an Indian company in a sector where FDI (Foreign Direct Investment) is prohibited would be 24%.
In case FPI investment thresholds are exceeded, such FPI entity would have 5 trading days to divest excess holding, failing which, investment would be re-categorized as FDI.
Definition of E-commerce entity is amended by the NDI Rules. As per the NDI Rules, e-commerce entity means a company incorporated under the Companies Act (1956 or 2013). Earlier, the definition also included a foreign company (as defined under the Companies Act, 2013) or an office, branch or agency in India owned or controlled by a person resident outside India and conducting e-commerce business. In terms of the new definition, only companies incorporated in India can engage in e-commerce activities in India.
Foreign venture capital institutions (FVCIs) have been permitted to invest in equity, equity linked instruments or debt instruments of Indian start-ups (irrespective of the sector in which start-up in engaged in). If the investment is being made in an equity instrument of a start-up, then the FVCI must comply with the sectoral caps, entry routes and other specified conditions.
Non-resident Indians and Overseas Citizens of India can now purchase or sell units of domestic mutual funds which invest more than 50% in equity.
Permission is given to OCIs (investing on a repatriable basis) to subscribe to the National Pension System governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA). The subscribing OCI must be eligible to invest as per the provisions of the Pension Fund Regulatory and Development Authority Act, 2013.
The power to prescribe terms and conditions for investment by an FVCI is now vested with the Central Government instead of the RBI.
Reporting of Foreign Investment Transactions: In exercise of the powers granted to it by the Notified Sections and the Non-Debt Instruments Rules which provides that the reporting requirements for any investment shall be as specified by the RBI, the RBI has framed the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“Reporting Regulations”).
Under the NDI Rules, a non-resident can, in specific circumstances, be issued shares against pre-incorporation/preoperative expenses for a wholly-owned company incorporated by the non-resident in India. Under TISPRO, the company was required to furnish a certificate from the statutory auditor certifying the above, (along with form FC-GPR). The NDI Rules have removed this requirement.
Foreign Central Banks are now allowed to purchase the securities of an Indian company on the terms and conditions as may be specified by the RBI and Securities and Exchange Board of India.
Conclusion:
The new NDI and DI norms have largely simplified the framework for foreign investment in India. Further, the NDI and DI norms clearly distinguish between debt and non-debt instruments and demarcate the authority responsible for each kind of instrument, i.e., the central government or the RBI (Central government for non-debt & RBI for debt). This clarity is likely to ease the approval process for investors.
