The policy makers are determined to attract foreign investment through Foreign Direct Investment (FDI) and continue to revisit sectoral caps and mode of investment in various sectors of the economy. The Department of Industrial Policy and Promotion (DIPP) and the Reserve Bank of India (RBI) together are working extensively towards achieving the higher targets set by the Government with respect to attraction of foreign investment in the country.
Para 6.2.18.1 of the Consolidated FDI Policy Circular, 2015 (Policy, 2015) permitted FDI up to 100% subject to certain conditions (up to 49% under Automatic route and under Government route beyond 49%) in Asset Reconstruction Companies (ARCs).
Further, DIPP vide Press Note 4[1] dated May 06, 2016 amended Para 6.2.18.1 of the Consolidated FDI Policy Circular of 2015[2] in order to allow 100% FDI under Automatic route and relaxed the conditions to be satisfied previously to a great extent. FDI Policy Circular, 2016 reflects the amended provision.
A comparative table of the changes in the conditions is as below:
| No. | Prior to issuance of Press Note 4 | Post issuance of Press Note 4 i.e. Current provision |
| 1 | Persons resident outside India can invest in the capital of Asset Reconstruction Companies (ARCs) registered with Reserve Bank, up to 49% on the automatic route, and beyond 49% on the Government route. | Persons resident outside India can invest in the capital of Asset Reconstruction Companies (ARCs) registered with Reserve Bank of India, up to 100% on the automatic route. |
| 2 | No sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing it through an FII/FPI controlled by the single sponsor |
Investment limit of a sponsor in the shareholding of an ARC will be governed by the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as amended from time to time. Similarly, investment by institutional/ non-institutional investors will also be governed by the said Act, as amended from time to time. |
| 3 | The total shareholding of an individual FII/FPI shall be below 10% of the total paid-up capital | The total shareholding of an individual FII/FPI shall be below 10% of the total paid-up capital |
| 4 | FIIs/FPIs can invest in the Security Receipts (SRs) issued by ARCs registered with Reserve Bank. FIIs/FPIs can invest up to 74 per cent of each tranche of scheme of SRs. Such investment should be within the FII/FPI limit on corporate bonds prescribed from time to time, and sectoral caps under extant FDI Regulations should also be complied with | FIIs/FPIs can invest in the Security Receipts (SRs) issued by ARCs registered with Reserve Bank. FIIs/FPIs may be allowed up to 100% of each tranche in SRs issued by ARCs subject to directions/guidelines of Reserve Bank of India. |
| 5 | All investments would be subject to provisions of section 3(3) (f) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. | All investments would be subject to provisions of section 3(3) (f) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. |
In the light of the above Press Note 4, RBI issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Tenth Amendment) Regulations, 2016 (‘Amendment Regulations, 2016’) to amend the existing entries of F.1, F.1.1 and F.1.2 of Annex B of Schedule 1 to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘Regulations, 2000’) in order to support the amendment made vide Press Note 4.
Additionally, Para 1, 1B and 1C of Schedule 5 of the Regulations, 2000 which deals with purchase and sale of securities other than shares or convertible debentures of an Indian company by a person resident outside India was amended vide the Amendment Regulations, 2016, the gist of which is tabulated below:
SCHEDULE 5 – Purchase and sale of securities other than shares or convertible debentures of an Indian company by a person resident outside India.
| Prior to Tenth Amendment | Current provision | |
| FIIs
Paragraph 1 of Schedule 5:
|
e) Security Receipts issued by Asset Reconstruction Companies provided that the total holdings of all FIIs put together shall not exceed 74% of the paid up value of each tranche of scheme of Security Receipts issued by the Asset Reconstruction Companies
Security Receipts issued by Asset Reconstruction Companies provided that the total holding by a single FII in each tranche of scheme of Security Receipts shall not exceed 10 per cent of the issue and the total holdings of all FIIs put togetherthe total holding of all eligible investors put together[3]shall not exceed 49 per cent of the paid up value of each tranche of scheme of Security Receipts issued by the Asset Reconstruction Companies; |
Security Receipts (SRs) issued by Asset Reconstruction Companies up to 100 per cent of each tranche, subject to directions/guidelines of Reserve Bank of India
|
| Other Non resident investors[4]
Paragraph 1B of Schedule 5 |
Security Receipts issued by Asset Reconstruction Companies provided that the total holding by an individual long term investor in each tranche of scheme of Security Receipts shall not exceed 10 per cent of the issue and the total holdings of all eligible investors put together shall not exceed 49 per cent of the paid up value of each tranche of scheme of Security Receipts issued by the Asset Reconstruction Companies; | Security Receipts (SRs) issued by Asset Reconstruction Companies up to 100 per cent of each tranche, subject to directions/guidelines of Reserve Bank of India
|
| RFPIs
Paragraph 1C of Schedule 5 |
Security Receipts issued by Asset Reconstruction Companies provided that the total holdings of all eligible investors put together shall not exceed 74% of the paid up value of each tranche of scheme of Security Receipts issued by the Asset Reconstruction Companies; | Security Receipts (SRs) issued by Asset Reconstruction Companies up to 100 per cent of each tranche, subject to directions/guidelines of Reserve Bank of India
|
| QFIs
Paragraph 1A of Schedule 5 |
Security Receipts issued by Asset Reconstruction Companies provided that the total holding by an individual QFI in each tranche of scheme of Security Receipts shall not exceed 10 per cent of the issue and the total holdings of all eligible investors put together shall not exceed 49 per cent of the paid up value of each tranche of scheme of Security Receipts issued by the Asset Reconstruction Companies; | No change made in Paragraph 1B of Schedule 5 |
Conclusion
The amendment is just to realign the limits prescribed under Annex B with that mentioned under FDI Policy. Further, it is not clear why amendment has not been made for investments in Security receipts by QFIs as covered under Paragraph 1A of Schedule 5 to FEMA Regulations.
[1] https://taxguru.in/rbi/policy-foreign-investment-asset-reconstruction-companies.html
[2] https://taxguru.in/rbi/consolidated-fdi-policy-effective-12-2015.html
[3] Substituted vide Notification No. FEMA. 272/2013-RB dated March 26, 2013
[4] Long term investors like Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds and Pension Funds and Foreign Central Banks registered with SEBI may purchase, on repatriation basis, either directly from the issuer of such securities or through registered stock broker on a recognised Stock Exchange in India.
(Author is associated with Vinod Kothari & Company and can be reached at corplaw@vinodkothari.com))
