Foreign Exchange Management (Debt) And (Non-Debt) Regulations, 2019 Read With (Non-Debt) Amendment Regulations, 2019

A STEP TOWARDS STREAMLINING THE INVESTMENT PROCESS IN INDIA

To bring in line the changes as proposed in the Finance Act, the Ministry of Finance vide its Notification (S.O. 3732(E)) dated October 17, 2019 notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Debt Instruments) Regulations, 2019 and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 vide its notification no. FEMA 396/2019-RB dated October 17, 2019

INTRODUCTION:

This article intends to highlight the amendments made to the erstwhile the 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, by way of presenting the following:

FEMA Act

  • Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) and Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019 and;
  • Foreign Exchange Management (Debt Instrument) Regulations, 2019 (“Debt Regulations”) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

BACKGROUND:

The Ministry of Finance further notified the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2019 on December 5, 2019 to bring in line with the provisions of Press Note No. 4 (2019 Series) as issued by Ministry of Commerce & Industry Department for Promotion of Industry and Internal Trade which were not incorporated in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Classification of instruments.

Debt Instruments (RBI) Non- Debt Instruments(MOF)
  • Corporate bonds;
  • Government bonds;
  • Borrowings by Indian firms through loans;
  • All tranches of securitization structure which are not equity tranche;
  • Depository receipts whose underlying securities are debt securities.
  • All investments in equity in incorporated entities (public, private, listed and unlisted);
  • Capital participation in Limited Liability Partnerships (LLPs);
  • All instruments of investment as recognized in the FDI policy as notified from time to time;
  • Investment in units of Alternative Investment Funds (AIFs) and Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InVITs);
  • Investment in units of mutual funds and Exchange- Traded Funds (ETFs) which invest more than 50% (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.

REASON BEHIND SEGREGATION OF POWERS BETWEEN THE CENTRAL GOVERNMENT AND THE RBI:

The amendments majorly deals with the segregation of power between the Central Government and the RBI pursuant to the investment by foreign entities in various capital instruments under the FEMA. The Central Government is empowered with framing of rules and regulations under debt instruments and the RBI is empowered with framing of rules and regulations under non-debt instruments.

The reason behind segregation of powers between the Central Government and the RBI is to ease the process of reporting of any foreign investment and to de-clog the RBI for the matters pertaining to the FEMA reporting. The segregation is aimed at boosting the investments in India. Further, the division in powers will bring about clarity in submission of returns by the investors pertaining to the foreign investments.

KEY TAKEAWAYS OF THE FOREIGN EXCHANGE MANAGEMENT DEBT AND NON-DEBT RULES, 2019 READ WITH THE FOREIGN EXCHANGE MANAGEMENT (NON-DEBT) AMENDMENT RULES, 2019

MAJOR HIGHLIGHTS OF DEFINITIONS:

  • The term “Equity Instruments” shall include equity shares, convertible debentures, preference shares and share warrants issued by an Indian company, which was earlier covered under the term “Capital Instruments”. 
  • The term “Non- debt Instrument” has been specifically defined under the said rules, which shall include the following:

a) all investments in equity instruments in incorporated entities: public, private, listed and unlisted;

b) capital participation in LLP;

c) all instruments of investment recognised in the FDI policy notified from time to time;

d) investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts);

e) investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per cent in equity;

f) junior-most layer (i.e. equity tranche) of securitisation structure;

g) acquisition, sale or dealing directly in immovable property;

h) contribution to trusts; and

i) depository receipts issued against equity instruments;

any other instruments other than mentioned above shall be included in the term “Debt Instrument”

  • The term “Hybrid Securities” has been specifically defined under the rules which includes instruments such as optionally or partially convertible preference shares or debentures and other such instruments as specified by the Central Government from time to time, which can be issued by an Indian company or trust to a person resident outside India

OTHER IMORTANT POINTS COVERED UNDER THE RULES:

  • The rules includes the sectoral cap with regards to investment and transfer of equity instruments of an Indian company done by Foreign Portfolio Investors;
  • The rules includes the sectoral cap with regards to investment and transfer of equity instruments of an Indian company done by Non-Resident Indian or an Overseas Citizen of India;
  • The rules includes the sectoral cap with regards to investment and transfer of securities done by other Non-Resident investors;
  • The rules includes the sectoral cap with regards to investment and transfer of equity instruments of an Indian company done by or to a Foreign Venture Capital Investor;
  • Issue of Convertible Notes by an Indian startup company in accordance with the rules and schedules mentioned therein;
  • Issue of equity instruments to the existing holders of the transferor company resident outside India pursuant to the Merger or demerger or amalgamation of Indian companies in accordance with the rules and schedules mentioned therein;
  • Acquisition and transfer of property in India by a Non-Resident Indian or an Overseas Citizen of India in accordance with the rules and schedules mentioned therein.

CONCLUSION:

The clear distinguish between the Non-debt and Debt instruments under the said rules and the segregation of the powers between the Central Government and the RBI will bring about more clarity and transparency in the reporting of foreign investment transactions.

Further, there are few loopholes in the new Debt and Non-Debt Rules, 2019 pertaining to the reporting provisions as compared to the erstwhile TISPRO which was more crystal clear with the reporting provisions of foreign investments.

SOURCE: https://www.rbi.org.in/

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Jaya Sharma-Singhania and Ruchita Purohit
Jaya Sharma-Singhania
Founder- Jaya Sharma & Associates
jaya@jsa-cs.com
Ruchita Purohit
Associate- Jaya Sharma & Associates
bodha@jsa-cs.com
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