Amendment through the Finance Act of 2015

The Finance Act of 2015 had proposed certain amendments to the Foreign Exchange Management Act, 1999 (“FEMA”). The Central Government (CG), vide sections 138 to 144 of Finance Act 2015, brought changes to FEMA. The said changes were not notified for long time. However, after a long delay, the amendments have finally been notified by the Central Government on October 15, 2019. On 15.10.2019, CG vide Notification Number S.O. 3715(E) notified Sections 139, 143(1) and 144 of Finance Act 2015, thereby inserting Section 6(2A) to FEMA, which gives power to CG to make rules with respect to regulating Non- Debt Instruments (“NDI”), and also amending Section 6(2)(a) of FEMA which gives power to Reserve Bank of India (“RBI”) to make regulations with respect to Debt Instruments. Further, sub-section (3) of Section 6 of FEMA has been omitted by with effect from 15-10-2019.

Section 6(2A) to FEMA read as under-

#[(2A)“The Central Government may, in consultation with Reserve Bank, prescribe-

(a) any class or classes of capital account transactions, not involving debt instruments, which are permissible;

(b) the limit upto which foreign exchange shall be admissible for such transactions; and

(c) any conditions which may be placed on such transaction.”]

# Inserted by Act 20 of 2015, Section 139(B) [with effect from 15-10-2019, vide  S.O. 3715(E), dated 15th October, 2019]

Further, Section 6(2)(a) to FEMA read as under-

“(2) The Reserve Bank may, in consultation with the Central Government, specify-

#[(a) any class or classes of capital account transaction, involving debt instruments, which are permissible;]

(b) the limit upto which foreign exchange shall be admissible for such transaction;

##[(c) any conditions which may be placed on such transactions;]

# Substituted by Act 20 of 2015, Section 139(A)(i) for clause (a) [with effect from 15-10-2019, vide S.O.3715(E), dated 15th October, 2019. Clause (a), before substitution, stood as under:

“(a) any class or classes of capital account transactions which are permissible.”

## Inserted by Act 20 of 2015, Section 139(A)(ii) [with effect from 15-10-2019, vide S.O.3715(E), dated 15th October, 2019.

It also pertinent to note that CG through Finance Act 2015 inserted Section 6(7) to FEMA, which gives power to CG to defined debt instruments in consultation with RBI. The primary motive behind such a move was to enable the CG to exercise greater control on capital flows such as equity.

Section 6(7) to FEMA read as under-

#(7)“For the purposes of this section,, the term “debt instruments” shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank.”

# Inserted by Act 20 of 2015, Section 139(D) [with effect from 15-10-2019, vide  S.O.3715(E), dated 15th October, 2019]

Further, clause (aa) and (ab) of Section 46 to FEMA were also inserted to give power to the CG to make rules regarding sub-section (7) of Section 6 and Sub-section (2A) of Section 6 of FEMA.

Clause (aa) and (ab) of Section 46 to FEMA read as under-

#(aa)“the instruments which are determined to be debt instruments under sub-section (7) of Section 6;

(ab) the permissible clause of capital account transactions in accordance with sub-section (2A) of Section 6, the limits of admissibility of foreign exchange, and the prohibition, restriction or regulation of such transactions.”

# Inserted by Act 20 of 2015, Section 143(i) [with effect from 15-10-2019, vide S.O.3715(E), dated 15th October, 2019]

Further, clause (a) of sub-section (2) of Section 47 to FEMA was also substituted to give effect of amendment in Section 6(2)(a) to FEMA.

Clause (a) of sub-section (2) of Section 47 to FEMA read as under-

#(a)“the permissible classes of capital account transactions involving debt instruments determined under sub-section (7) of Section 6, the limits of admissibility of foreign exchange for such transactions and the prohibition, restriction or regulation of such capital account transactions under section 6..”

# Inserted by Act 20 of 2015, Section 144(A)(i), for clause (a) [with effect from 15-10-2019, vide S.O.3715(E), dated 15th October, 2019]. Clause (a) before substitution, stood as under:

“(a) the permissible classes of capital account transactions, the limits of admissibility of foreign exchange for such transactions, and the prohibition, restriction or regulation of certain capital account transactions under section 6.”

Rules and Regulations to the amendments to FEMA and relevant Notifications.

Pursuant to the amendments to FEMA through Finance Act, 2015, recently, the Ministry of Finance notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“the Nondebt Instruments Rules”) vide Notification No. 3732(E) dated 17th October, 2019 and Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019.  

The RBI issued the Foreign Exchange Management (Debt Instrument) Regulations, 2019 (“the Debt Instruments Regulations”). Consequent to issue of NDI Rules by Finance Ministry, RBI has issued Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 vide Notification No. G.S.R 795(E) dated 17th October, 2019. The Regulation gives a clear picture about mode of payment, remittance of sale proceeds, reporting requirements etc. with respect to issue or transfer of securities.

Whilst the Non-debt Instruments Rules superseded the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (TISPRO Regulations) as well as the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (ATIP Regulations), whereas the Debt Instruments Regulations only superseded the TISPRO Regulations.

The power is shifted to Finance Ministry for notifying any change in FDI Rules. Now the CG will make the rules and RBI will regulate the same. The primary intent behind the notification of the Non-debt Instruments Rules and the Debt Instruments Regulations was to give effect to the amendments proposed in the Finance Act, 2015. Notably, under the extant regulations, the RBI was only empowered to specify classes of permissible capital account transactions. However, the Finance Act, 2015, streamlining the power division between the RBI and the CG, gave the RBI the right to specify classes of capital account transactions, involving debt instruments and a similar power to the Central Government, in respect of non-debt instruments.

With the above changes and notifications, CG becomes governing body for Non-debt transactions like investment in equity of incorporated entities, capital participation in LLPs, acquisition and dealing immovable properties, contribution to trusts, investment in units of Alternative Investment Funds (AIFs) & equity oriented mutual funds, etc. And RBI becomes governing body for debt transactions like investment in government bonds, corporate bonds, borrowings by Indian firms through loans, etc.

Even after above changes, RBI still holds the responsibility of monitoring the foreign exchange related to non-debt instruments, and so it notified FEM (Mode of Payment and Reporting of Non-debt Instruments) Regulations, 2019.

It is noted that there are no drastic changes made in the Non-debt Instruments Rules, few changes have been done in the definitions, Sectoral cap etc.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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