♦ Introduction to foreign investment in India and ITS regulations
India has sought to liberalise its economy and has continuously opened up most of its industrial and business sectors to foreign investment since 1991
Foreign investment in India is principally governed by the Foreign Exchange Management Act 1999 (FEMA) and the regulations framed thereunder, which consolidate the law relating to foreign exchange in India.
To regulate foreign investment, the Reserve Bank of India (RBI) had published the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (TISPRO 2000) and thereafter TISPRO 2017 (as amended from time to time), under the FEMA was published on 7 November 2017
On 15 October 2019, the central government notified, inter alia, certain amendments to the FEMA, pursuant to which, the central government, rather than the RBI, has been granted the power of specifying all permissible non-debt instruments capital account transactions and the RBI has been granted the power of specifying all debt instruments capital account transactions.
Pursuant to these amendments to the FEMA, the central government, on 17 October 2019, notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (Rules 2019) and the RBI notified the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (Regulations 2019) and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (Reporting Regulations 2019)
♦ Different instruments of foreign investment
Foreign Capital can come into India either in the form of Debt or in the of form of non-debt like Equity/Capital Participation
> DEBT instruments
Debt instruments means the instruments listed under Schedule 1 of the Foreign Exchange Management (Debt Instruments) Regulations 2019. It is a documented & binding obligation that provides funds to an entity in return for a promise from the entity to repay the lender or investor in accordance with terms of a contract.
> Non-DEBT Instruments
Non -Debt instrument means the instruments listed under Chapter I of the Foreign Exchange Management (Non-Debt Instruments) Rules 2019.
♦ Criteria for foreign investment into Non-DEBT instruments
> Countries of concern
- India welcomes citizens of almost all countries to invest in India. However, with effect from 17 April 2020, citizens / companies of all countries that share land border with India (Pakistan, Bangladesh, China, Nepal, Afghanistan, Bhutan, and Myanmar) require government approval even when investing in sectors that are under automatic route. Notably, entities from other countries with beneficiary / beneficiaries from any of these countries will also need government approval
- Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment
- In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction of the two above mentioned points, such subsequent change in beneficial ownership will also require Government approval.
> Entry routes for foreign investment
Every non-resident entity is allowed to invest in India either under Automatic or Government Approval Route, except in prohibited sectors. The detailed FDI policy by DPIIT – https://dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy
> Investment on repatriation basis
> Investment on Non-repatriation basis
Key points:-
Investment shall not be in Equity instruments or units of Nidhi Company or company engaged in agricultural/ plantation activities or real estate business or construction of farm houses or dealing in transfer of development rights.
♦ Downstream investment
Key points:-
1. The Indian entity which has received such investment shall comply with the sectoral caps, entry routes, pricing guidelines and the FDI linked performance conditions as applicable for foreign investment.
2. Downstream investment, by LLP which is not owned or controlled by resident Indian citizens or owned or controlled by non-resident is allowed, in an Indian company operating in sectors where foreign investment up to 100% is permitted through automatic route and where there are no FDI linked performance conditions.
3. For the purpose of downstream investment, the portfolio investment held as on 31st March of the previous financial year in the Indian company making the downstream investment shall be considered for computing its total foreign investment
4. Any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned for total foreign investment
5. For the purpose of downstream investment, the Indian entity making the downstream investment shall bring in requisite funds from abroad and not use funds borrowed in the domestic markets and the downstream investments may be made through internal accruals and for this purpose, internal accruals shall mean profits transferred to reserve account after payment of taxes.
♦ Pricing guidelines
> Repatriation basis
| PARTICULARS | LISTED COMPANY | UNLISTED COMPANY |
| Capital Instruments issued by an Indian company to a person resident outside India – Price should not be less than | The price worked out in accordance with the relevant SEBI guidelines | The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a CA or a SEBI registered Merchant Banker or Cost Accountant |
| Capital Instruments transferred from a person resident in India to non-resident – Price should not be less than
|
The price worked out in accordance with the relevant SEBI guidelines or the price at which a preferential allotment of shares can be made under the SEBI Guidelines | The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a CA or a SEBI registered Merchant Banker or Cost Accountant |
| Capital Instruments transferred from a non-resident person to a resident person- Price should not be more than | The price worked out in accordance with the relevant SEBI guidelines or the price at which a preferential allotment of shares can be made under the SEBI Guidelines | The fair value as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a CA or a SEBI registered Merchant Banker or Cost Accountant |
| Subscription to Memorandum of Association (MOA) | Where shares in an Indian company are issued to a person resident outside India in compliance with the provisions of the Companies Act, 2013, by way of subscription to MOA, such investments shall be made at face value subject to entry route and sectoral caps. | |
| Share Warrants | The price/ conversion formula shall be determined upfront.
The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such warrants. |
|
| Swap of Capital Instruments | Irrespective of the amount, valuation will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country | |
Key points-
1. Also note that Pricing Guidelines apply for Indian company buying back shares in a scheme of merger/ de-merger/ amalgamation of Indian companies approved by NCLT/ competent authority for Buyback of shares/ Reduction of Capital by an Indian company
2. The pricing of the partly paid equity shares shall be determined upfront.
3. Investment in an LLP either by way of capital contribution or by way of acquisition/ transfer of profit shares, should not be less than the fair price worked out as per any valuation norm which is internationally accepted/ adopted as per market practice (hereinafter referred to as “fair price of capital contribution/ profit share of an LLP”) and a valuation certificate to that effect should be issued by a Chartered Accountant or by a practicing Cost Accountant or by an approved person from the panel maintained by the Central Government.
> Non repatriation basis
Key points:-
1. The pricing guidelines shall not be applicable for investment in capital instruments by a person resident outside India on non-repatriation basis.
2. The pricing guidelines will not be applicable for any transfer by way of sale done in accordance with SEBI regulations where the pricing is prescribed by SEBI.
3. A Chartered Accountant’s Certificate to the effect that relevant SEBI regulations/ guidelines have been complied with has to be attached to the form FC-TRS filed with the AD bank
♦ Reporting requirements
| FORMS | APPLICABILITY FOR FILING/ COMPLIANCE OF FORMS | DUE DATES FOR FILING |
| FORM
FC-GPR |
For issue of equity instruments to a person resident outside India by an Indian company & where such issue is considered as Foreign Direct Investment (For allotment of shares under Initial Public Offer (IPO) or Qualified Institutional Placement (QIP) under the applicable SEBI Regulations need not be reported in Form FC-GPR) | Within 30 days from the date of issue of the equity instruments |
| FORM FLA | To be submitted to RBI by an Indian company which has received foreign investment, in the previous year and current year (Year shall mean April to March) | On or before 15th July of each year |
| FORM
FC-TRS |
1. Form FCTRS is required to be filed for transfer of capital instruments between:
(i) a non-resident holding capital instruments in an Indian company on a repatriation basis and a non-resident holding capital instruments on a non-repatriation basis; and (ii) a non-resident holding capital instruments in an Indian company on a repatriation basis and a person resident in India 2. However, transfer of capital instruments between a non-resident holding capital instruments on a non-repatriation basis and a resident is not required to be reported. 3. Also, Sale of capital instruments on a recognized stock exchange by a non-resident has to be reported by such person. |
Shall be filed within 60 days of the transfer of equity instruments or the receipt or remittance of funds, whichever is earlier
|
| FORM ESOP | An Indian company issuing employees stock option (ESOP) to non-residents who are its employees/ directors or employees/ directors of its holding company/ joint venture/ wholly owned overseas subsidiary/ subsidiaries shall file Form ESOP | Within 30 days from the date of issue of ESOPs |
| FORM FDI LLP(I) | A Limited Liability Partnerships (LLPs) receiving amount of consideration for capital contribution and acquisition of profit shares is required to submit a report in Form Foreign Direct Investment- LLP(I) | Within 30 days from the date of
receipt of the amount of consideration |
| FORM FDI LLP(II) | The LLPs shall report disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) | Within 60 days from the date of receipt of funds |
| FORM DI | An Indian entity or an investment vehicle making downstream investment in another Indian entity which is considered as indirect foreign investment for the investee company shall file form DI with the Reserve Bank | Within 30 days from the date of allotment of capital instruments |
| FORM CN | A start-up company issuing Convertible Notes (CNs) to a person resident outside India shall file Form CN. Transfer of Convertible Notes of a start-up company by way of sale between a resident and a non-resident shall be reported by the resident transferor/transferee | Within 30 days of such issue or transfer |
Key points:-
1. Reporting of Foreign Portfolio Investment for transactions in listed securities: No reporting requirements to be followed by the investor as it would be the authorized bank’s responsibility to ensure that the data submitted to Reserve Bank is reconciled by periodically taking a FPI holding report or NRI holding report for their bank for all the investments.
Authors-
CA Shreyans Dedhia, Partner | shreyans.dedhia@masd.co.in
Harshil Mehta, Consultant | harshil.mehta@masd.co.in
Author Bio
Very well explained. This article was really helpful