CHAPTER 1 – INTRODUCTION
1.1 ABSTRACT
Foreign Exchange Management Act, 1999 (FEMA) which was enacted by the Parliament has substituted the Foreign Exchange Regulations Act, 1973. FEMA came into effect on 1st June, 2000. The importance of foreign exchange reserves was felt by the Exchange Control of India in the year 1939 as there was a huge shortage of it. Various rules became a necessity for the system of exchange control and were brought under the Defense of India Act, 1939. Foreign Exchange Regulation Act, 1947 was adopted on a temporary basis for initial 10 years because the foreign exchange predicament continued for a long time. Though, the purpose of Act for foreign exchange crisis did not bring any variation in economic development, nor it brought back to normal. Considering the difficulty, FERA was entered perpetually in the law since the year 1957. The Act was a good support for the economic system and shortage of foreign exchange was brought back to normal. There was also need for various amendments as well as new rules which needs to be made; the Act was replaced with Foreign Exchange Regulations Act, 1973 which came into force from 1st January, 1974.
During the 1990s, new approach was brought towards the external sector where the economic reforms brought huge changes. In the year 1991 financial investments were allowed in various segments because of economic liberalization policy which was brought in by the Government of India. Due to this there was an upturn in the flow of foreign exchange in India and also in the foreign reserves. In some kinds of payments FERA prescribed strict rules which were affecting the foreign exchange situation. Due to such rules, Foreign exchange and various securities which were indirectly affected the foreign exchange and the import and export of currency. There was a need for new act which can regulate payments and also bring a proper import and export of currency so that the foreign exchange reserves in country grow at a good pace. FERA was than repealed in the year 1999 under the government of Atal Bihari Vajpayee who replaced it by the Foreign Exchange Management Act, 1999 which came into force in 1st day of June, 2000. This Act relaxed foreign exchange controls and even gave some limitations to some kinds of foreign investments. The research will thereby conclude by the giving certain suggestions as per required. The research project will cover the rules of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 where the rules for a person who is residing outside India for investing will be studied. Further it will help us to understand investment by Foreign Portfolio Investor (FPI) and Down-stream investment will also be studied in detail. Further, suggestion what can be done by taking various measures will also be noted and will conclude as per required.
1.2 OBJECTIVES
FEMA was mainly introduced in India to ease all the import and export trade or payments and for safeguarding foreign exchange market. Foreign exchange transactions are classified into two parts i.e. Capital Account transactions and Current Account transactions and FEMA frameworks the procedures to transact in India. FEMA can even support as well as amend the law relating to foreign exchange with the objective of properly maintaining the forex market in India. The objective of FEMA is to eliminate inconsistency of payments in India and maintain a proper flow of foreign exchange. Further, dividing the instruments into non-debt and debt instruments and for knowing the rules separately, thus the Reserve Bank of India prepared separate rules which provides in detail requirements for investments in India.
1.3 AIM
The aim of the project is to know about FEMA and as RBI being the regulator in FEMA and also foreign exchange transactions, it allows Authorised persons who deals in foreign exchange. The aim is to understand the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. This study also focuses on about Foreign Portfolio Investor, Down-stream Investment and also various rules for investment by person who is residing out of India.
1.4 STATEMENT OF PROBLEM
RBI having a vast role towards the foreign exchange market requires to balance both the export as well as import of foreign exchange reserves as well stability of the flow in the country so that it does not remain at lower level. After liberalisation in 1991 where foreign exchange had a huge inflow in India the FERA made rigid rules towards it and several rules had been brought into Foreign Exchange Management Act, where it will be managing foreign exchange. One of such rules which are Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 which is made for the rules regarding the investment which is made in India and also about the investment which is done by either portfolio investor, non-resident investor and by foreign venture capital investor.
1.5 RESEARCH QUESTIONS/ HYPOTHESIS
Whether the limits prescribed in Non-Debt Instruments, 2019 for various foreign investors while investing in India ensures proper flows and does it bring positive changes in the foreign exchange market by its strict rules?
1.6 RESEARCH METHODOLOGY
The research is a doctrinal study of Foreign Emergency Management (Non-Debt Instruments) Rules, 2019. This project is based from various readings, observation from different authors, journal as well as research articles and analysing statutory provisions. The Library-based Research method will be followed for deriving the Hypothesis. The search will be conducted on the basis of primary sources such as statutes secondary sources such as books, online articles available freely as well as on legal databases. The paper is based on pure theoretical research.
1.7 REVIEW OF LITERATURE
The Author[1] stresses on simplifying the meaning of Foreign Exchange Management Act, 1999 by explaining the foreign exchange and importance of foreign exchange reserves. The Author provides brief side on historical background as well as its applicability. The Author also places a good explanation on the current and capital account transactions classifying it with the permissible activity to person resident and person resident out of India. The research paper also focused on the various aspects of RBI which is a key regulator of FEMA and also about the rules and limits for investing in and outside India. Various rules and regulations are mentioned to give a brief about FEMA.
In this the author[2] seeks to uphold the rules and regulations of FEMA and also explains in brief about the prohibited activities and allowable activates for investing in India. He also classifies in various sectors about the limit up to which investment can be done with FEMA having broad guidelines. The role of RBI for the functioning and prior approvals for certain type of investments is also explained. The Author gives us the brief about the overview of FEMA and also the importance of investments in India which is important for the development of the economy. Further, the author elaborates much in detail about down-stream investment.
1.8 CHAPTERIZATION
I have divided my project into 7 chapters. The first chapter deals with the introduction and states about the historical background of FEMA where how the need for changing provisions of FEMA had arisen and also a short introduction to Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 along with hypothesis, objectives and literature review. Chapter two explains about the various investments which can be done in India and the conditions which need to be followed by the investors. Further, some of the important sectors with the sectoral caps and their entry route is also added. Chapter 3 deals about the investment which are done by Foreign Portfolio Investor (FPI), Foreign Venture Capital Investor (FVCI) as well as Non-Resident India (NRI) can be understood also the necessary schedule for Non-Resident Indian (NRI) and Foreign Venture Capital Investor (FVCI) is also explained where with respect to the sectors permissible to a Foreign Venture Capital Investor can be known. Chapter 4 explains about the various provisions with respect to convertible notes, amalgamation or merger of Indian companies and pricing guidelines. Further the concept of down-stream investment is explained along with the various conditions and rules which is stated in these rules. Chapter 5 deals about the transfer and acquisition of immovable property in India where, joint acquisition by the spouse and acquisition by a NRI or OCI provisions can be understood. Further acquisition done by long-term visa holder and also any sale or purchase of property by Diplomats is stated. The case study of Reliance Jio is added in Chapter 6 where during the year 2016 when the plan for taking over 4G by the launch of Jio to the plan for listing Jio in the overseas markets is dealt in detail. Finally, in chapter 7 I have given suggestion about what can be done in developing the Indian economy and increase investments in different sectors and ended my research project with conclusion.
CHAPTER 2 – INVESTMENT BY PERSON RESIDING OUTSIDE INDIA
2.1 INTRODUCTION
Foreign Emergency Management Act, 1999 (FEMA) looks after the foreign exchange transactions, cross border funds and even trade between the resident and non-resident of India. FEMA is a short Act, having 49 sections and operating of FEMA is similar to any other commercial law. FEMA has various guidelines and also rules which need to be followed. If the guidelines are not followed or if the transactions fall outside the limit, one needs to obtain permission for it. If there is any violation to the guidelines then the result is penalty. Prosecution can also take place if the penalty is not paid within the specified period of time.
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 also known as (NDI Rules) was notified by the Central Government on 17th October, 2019 by superseding Foreign Exchange Management (Transfer of issue of security by a person resident outside India) Regulations, 2017 (TISPRO) and also Foreign Exchange Management (Acquisition and Transfer of immovable property in India) Regulations, 2018. Further for putting things in a proper manner Foreign Exchange Management (Debt Instruments) Regulations, 2019 was also have been notified by the Reserve Bank of India by superseding the above regulations.
2.2 CONDITIONS TO INVESTORS
No Venture capital fund or association of firm or any Indian entity must receive any type of investment in India from a person who is residing outside India unless the Reserve Bank of India allows[3] such entity or association who made an application with sufficient reasons. Further any investment which is made from outside India has to check all proper sectoral caps, entry routes[4] or the limits as the case may be.
2.3 INVESTMENTS OF PERSON RESIDING OUTSIDE INDIA
1. A person outside India can invest in India by either purchasing[5], selling equity instruments of Indian company or by subscribing and which is as per the conditions which are specified in the Schedule. Further any citizen of Pakistan must invest only from Government route in activities which are other than space, defence, atomic energy or any other such activities which are restricted for foreign investment. Also, in the event for transfer of ownership of future foreign direct investment (FDI) which results directly or indirectly in beneficial ownership and falls within the restriction needs to be also require Government approval.
2. A person residing outside India who is having investment in India can make equity instruments which are issued by such companies who is issuing right or bonus issue [6]provided the offer which is made by the Indian company should be as per the provisions of Companies Act, 2013 and the issue made should not breach the sectoral cap. Mode of payment shall be as per the Reserve Bank of India as specified.
Employees’ stock option or sweat equity shares can also be issued[7] by the Indian company to its employees or directors of its joint venture or overseas subsidiary who are residing outside India.
3. A person outside India who is holding equity instruments or units of an Indian company can transfer in compliance by the conditions specified in the Schedule[8] and which are subject to terms which is if a person who is residing outside India and not being an overseas citizen can transfer by way of sale or gift such equity instruments or units of Indian company to any other person outside India provided if the company is engaged in such sectors which need Government approval than prior approval of government is a must. Further through a recognised stock exchange in India a person who is residing outside India can and holds units or equity instruments of an Indian company can sell to a person who is residing in India or can also transfer by way of gift or sale provided, the transfer of sale should be subject to documentation, pricing guidelines as well as reporting requirements specified by the Reserve Bank of India.
A person residing outside India who holds such equity instruments which contains an optionality clause and while exercising the option or such right, can exit without any confirm return which are subject to the pricing guidelines and also minimum lock-in period or lock-in period of one year whichever is higher as prescribed in these rules. Further an amount of not exceeding twenty five percent can be transferred between a person resident and outside India of equity instruments. It needs to be paid on deferred basis by the buyer within eighteen months from the date of agreement of transfer or can be settled through escrow arrangement between buyer and seller within eighteen months or may be indemnified by the seller within eighteen months from the date full consideration is paid.
SCHEDULE 1
- Foreign Direct Investment is restricted for sectors such as gambling, nidhi company, chit funds, Lottery business which includes both private as well as government, trading in transferable development rights, real estate business, manufacturing of cigarettes, cigars, activities which are not open for private investment i.e. atomic, railway, collaborations of foreign technology which includes in any form such as licensing for franchise, management contract, trade mark also restricted for lottery business.
- Following are the some of the important sector with their entry route and sectoral cap which are mentioned –
a. Agriculture and Animal Husbandry which includes horticulture, floriculture and cultivation of vegetables, production of planting materials and seeds, services relating to allied and agro sectors have a sectoral cap of 100% and their entry route is automatic i.e. investment by the person residing outside does not need permission from the Reserve Bank of India.
b. Plantations of Coffee, Rubber, Tea, Cardamom, Palm oil tree, Olive oil tree have a sectoral cap of 100% and their entry route is automatic and no investment is allowed in any other plantations.
c. Mining which metal and non-metal ores including silver, gold, diamond which are subject to Mines and Minerals (Development and Regulation) Act, 1957, Coal and Lignite for captive consumption for power projects or for setting processing plants such as washeries or for sale and activities which includes processing infrastructure have a sectoral cap of 100% and their entry route is automatic. Whereas, Mining as well as mineral separation of titanium which is subject to sectoral regulations have a sectoral cap of 100% and their entry route is government.
d. Petroleum and natural gas which are infrastructure and are relating to products and also manufacturing have a sectoral cap of 100% and their entry route is automatic but refining of petroleum by Public Sector Undertakings (PSUs) without disinvestment have a sectoral cap of 49% and their entry route is automatic.
e. Teleports, Direct to Home (DTH), etc. have a sectoral cap of 100% and their entry route is automatic.
f. Defence Industry which are subject to industrial license have a sectoral cap of 100% and their entry route is automatic up to 74% and government route more than 74% is likely in resulting access to technology which needs to be recorded.
CHAPTER 3 – INVESTMENT BY FOREIGN PORTFOLIO INVESTOR, NON-RESIDENT INDIAN, FOREIGN VENTURE CAPITAL INVESTOR
3.1 FOREIGN PORTFOLIO INVESTOR
a. It means a person who is registered[9] with respect to the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014. Foreign portfolio investment is a type of investment where investors hold securities and assets outside their country. Such investment can include bonds, stock, mutual funds or exchange traded funds. It is an indicator for stock market performance and experts have a look on it carefully. Equity instruments are less than ten percent of the issued paid-up capital in fully diluted basis.
b. Subject to the conditions which are stated in the Schedule 2 a portfolio investor can purchase instruments of equity of an Indian company [10]which is listed on recognised stock exchange. Further an investor can also hold or sell Indian Depository Receipts (IDRs) of a company outside India and issue in Indian market.
c. Government approval must be taken for transferring if the company is working in the sector which needs government approval[11] and apart from this other holding of equity instruments can be transferred in compliance with the conditions. As per Foreign Exchange Management (Transfer of issue of security by a person resident outside India) Regulations, 2017 the average limit made by FPI’s in an Indian company was 24%. Initially it was deleted in the Non-Debt Instruments Rules and then restored by the Amendment Rules. The rules brought a substantial change in Schedule 2 effective from April 1, 2020 the aggregate limit would be the sectoral cap which will be applicable to the Indian company. The company with the approval of Board of Directors, by special resolution and resolution respectively reduce the limit before March 31st, 2020 to a low threshold of either 24%, 49%, 74% as may deemed fit or by increasing the average limit to 49% or 74% or the sectoral cap as deemed fit. Once such aggregate limit is increased it cannot be reduced later.
3.2 NON-RESIDENT INDIAN
Subject to the conditions which are stated in the Schedule 3 a Non-Resident Investor or Overseas Citizen of India can purchase instruments of equity on repatriation basis of an Indian company [12]which is listed on recognised stock exchange. Further an investor can also hold or sell Indian Depository Receipts (IDRs) of a company outside India and issue in Indian market.
Government approval must be taken for transferring if the company is working in the sector which needs government approval and apart from this other holding of equity instruments can be transferred in compliance with the conditions. Where acquisition of equity instruments is done as per Schedule 3 [13]and resulted in breach which is applicable to sectoral limits than such investor must sell to a person residing in India within the time stipulated by the Reserve Bank of India. If such investor holds equity instruments under Schedule 4 on non-repatriation basis can with the prior approval of the Reserve Bank of India can transfer to person residing outside India subject to the conditions i.e. the done should be eligible for holding security under Schedules and such gift should not exceed five percent of paid up capital also the sectoral cap shall not be breached.
SCHEDULE 2
An individual cannot hold exceeding five percent of total paid-up capital on full diluted basis and the total of all NRI or OCI also cannot hold more than ten percent of the paid-up equity capital on fully diluted basis or series of preference shares or share warrants or debentures. Provided the aggregate of 10 percent can be raised to 24 percent by special resolution and passed by General body of Indian company.
3.3 FOREIGN VENTURE CAPITAL INVESTOR
An investor can do investments subjects to the conditions which are specified in Schedule 7. A foreign venture capital investor who is holding of Indian company equity instruments[14] can transfer such units in compliance with the conditions, which is prescribed in Schedule 7 and also by Reserve Bank of India and Securities and Exchange Board of India.
SCHEDULE 7
The sectors which are allowed for a Foreign Venture Capital Investor are –
i. Biotechnology
ii. Nanotechnology
iii. IT relating to software and hardware development
iv. Research and development of chemical entities in pharmaceutical sector
v. Seed research and development
vi. Poultry industry
vii. Dairy industry
viii. Infrastructure sector
ix. Production of bio-fuels
x. Poultry industry
xi. Hotel convention centres with a capacity of seating more than three thousand.
CHAPTER 4 – DOWNSTREAM INVESTMENT AND OTHER PROVISIONS
4.1 CONVERTIBLE NOTES
A person residing outside India other than the citizens or entity of Pakistan or Bangladesh can by an Indian start-up company purchase convertible notes[15] for an amount of twenty five lakh rupees or more. Further such start-up company who is engaged in sector where investment is from person residing outside India require prior Government approval and then can issue such convertible notes and should be in compliance with sectoral caps, entry route, pricing guidelines and such other conditions for investment. Mode of payment must be as per the Reserve Bank of India. A person resident outside India can transfer by convertible notes, sale to/ from a person residing in/or outside India provided such transfer takes place with respect to entry routes and pricing guidelines.
4.2 MERGER OR AMALGAMATION OF INDIAN COMPANIES
When a scheme for amalgamation or merger of two or more companies or reconstruction through demerger which is approved by National Company Law Tribunal (NCLT)[16] or such competent authority, the new company can issue equity instruments to existing holders of transferor company residing outside India with subject to the conditions i.e. the transfer should be in compliance with the sectoral caps, entry routes and conditions of investment by the person residing outside India. Provided if the percentage can breach the conditions or sectoral caps then the transferee or transferor company may obtain all required approval from the central government. The person residing outside India should not engage in sectors which are restricted with the transferor or transferee company.
4.3 PRICING GUIDELINES
Firstly the guidelines which are will be specified shall not be applicable for the transfer through sale which is in accordance with the Securities and Exchange Board of India. The prices of instruments of equity of an Indian Company shall be unless otherwise specified in such rules shall not be less[17] than the working out of prices with accordance to the Securities and Exchange Board of India in the case of listed Indian company or if company is going by way of delisting process which is as per the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 and the valuation done for any international pricing methodology on arm’s length and duly certified by Merchant Banker or Chartered Accountant who are registered with the Securities and Exchange Board of India.
If a transfer is made by a person residing outside India to person residing in India and vice versa specified in such rules shall not be less than the working out of prices with accordance to the Securities and Exchange Board of India in the case of listed Indian company or if company is going by way of delisting process which is as per the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 and the valuation done for any international pricing methodology on arm’s length and duly certified by Merchant Banker or Chartered Accountant who are practising as Cost Accountant or who are registered with the Securities and Exchange Board of India.
4.4. DOWNSTREAM INVESTMENT
It is an investment which is made by a company through acquisition of shares or control or subscription in another company. Investing in other downstream company by a company who is already having foreign investment is known as downstream investment which is subject to control and ownership. As per RBI, the first Indian company has accepted foreign investment and is making investment in second Indian company.
Foreign direct investment applies norms to both direct as well as indirect investments into Indian companies. If there is a direct investment, then the non-resident owner will invest directly in Indian company. Indirect FDI also known as downstream investment which is made by an Indian company, controlled and owned by non-residents in other Indian company. It needs to follow norms which are applicable to direct FDI with respect to sectoral caps, entry route and other conditions. The other Indian entity receiving foreign investment should not be controlled or owned by Indian resident citizens or controlled by person residing outside India.
Such downstream investment are subject to conditions which include permission of Board of Directors,[18] funds requirements for investments which needs to be brought from abroad and pricing guidelines. Further the reporting requirements shall be as per the Reserve Bank of India in Foreign Exchange Management (Mode of Payment and Reporting of Non-debt Instruments) Regulations, 2019 a person residing in India shall follow the pricing guidelines. The Indian company or the first company who is making downstream investment will be responsible for compliance with these rules. Such company needs to have a certificate with effect from the auditor on annual basis and such regulations compliance must be mentioned in Annual report. If auditor gave qualified report, then the company needs to obtain acknowledgement from Regional office of the Reserve Bank of India. The company who is making investment must further file Downstream Investment form with the Reserve Bank of India along with the mode of payment and reporting guidelines within the period of 30 days from allotting the equity instruments and also notify the Secretariat for Industrial Assistance DPIIT within 30 days of investment.
CHAPTER 5 – TRANSFER AND ACQUISITION OF IMMOVABLE PROPERTY IN INDIA
5.1 TRANSFER AND ACQUISITION OF PROPERTY BY NON-RESIDENT INDIA OR OVERSEAS CITIZEN OF INDIA
An OCI or a NRI can purchase immovable property in India except farm house or agricultural land[19] or any plantation property. Provided the consideration for transfer must be made out of funds which are received in India by way of banking channels by inward remittance from places outside India or funds which are held in non-resident account and are maintained as per the provisions of the Act. Further no payment for any such transfer can be made by foreign currency notes or travellers cheque or by any other modes other than those which is allowed in such clause.
Purchase of any immovable property in India except farm house or agricultural land or any plantation property through gift by a person residing in India or from OCI or NRI who by any way is relative[20] as per clause 77 of Section 2 of the Companies Act, 2013. Acquiring any immovable property through inheritance from a person residing outside India, who purchased such property as per the provisions of foreign exchange law during the time of acquisition by him or by a person residing in India.
Further, a person not being an NRI or OCI and residing out of India, is the spouse of an OCI or NRI can acquire such immovable property[21] (not being an agricultural land or plantation property or farm house) with his/ her spouse provided the consideration shall be made of such transfer out of funds which are received in India by way of banking channels by inward remittance from places outside India or funds which are held in non-resident account and are maintained as per the provisions of the Act. Further no payment for any such transfer can be made by foreign currency notes or travellers cheque or by any other modes other than those which is allowed in such clause.
5.2 SALE OF PURCHASE BY FOREIGN EMBASSIES OR CONSULATE GENERALS OR DIPLOMATS
A Diplomat or Consulate General or Foreign Embassies can sell or even purchase immovable property in India except plantation property or agricultural land or farm house provided such clearance needs to be obtained from Government of India[22] and Ministry of External Affairs and the acquisition of such immovable property the consideration must be paid from the funds which is remitted from abroad by way of banking channels.
5.3 ACQUISITION BY LONG-TERM VISA HOLDER
A citizen of Bangladesh, Pakistan or Afghanistan who is belonging to minority communities in such countries likely Sikhs, Buddhists, Hindus, Jains, Christians and Parsis and such person is residing in India granting with Long-term Visa[23] by the Central Government can purchase one immovable property in India for residential as dwelling unit for self-occupation and for carrying out self-employment work one immovable property which are subject to conditions i.e. the property must not be located around the protected or restricted areas which is notified by Cantonment areas and Central Government. Specifying by submitting a declaration the source of funds as well as he or she is on long-term visa to the Revenue Authority of that district where property is located. Further the property registered by the relevant documents must mention the nationality as well as the fact about such person who is on long-term visa. The property can be attached if such person indulges in anti-Indian activities and the documents copy of that property should be submitted to Foreign Registration Office (FRO) or Deputy Commissioner of Police (DCP) or Foreign Regional Registration Office (FRRO) and Ministry of Home Affairs (Foreign Division).
5.4 REPATRIATION OF SALE
The authorised dealer can permit repatriation of sale proceeds[24] outside India in the event of sale of immovable property which are other than plantation property or farm house or agricultural land subject to conditions likely such immovable property is purchase as per provisions of foreign exchange law during the time of acquiring. The amount for such property was paid in foreign exchange which is received through banking channels or by funds held in Foreign Currency Non-Resident Account. In case of residential property, repatriation for sale is restricted to two properties.
5.5 PROHIBITION ON TRANSFER OF IMMOVABLE PROPERTY IN INDIA
No person who is residing outside India can transfer any property in India provided the Reserve Bank of India by sufficient reasons[25], allows transfers with the conditions as considered necessary. An authorised dealer which is a bank subject to the guidelines issued by the Reserve Bank, allow a person residing in India or charge his immovable property in favour of security trustee for securing external commercial borrowing under the provisions of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000. A person residing outside India who has purchased immovable property as per provisions of foreign exchange law or special permission of the Reserve Bank can transfer property to a person residing in India provided such transactions is done through banking channels and further that person is not restricted from such purchase.
5.6 PROHIBITION ON TRANSFER OR ACQUISITION OF IMMOVABLE PROPERTY BY CITIZENS OF SOME COUNTRIES
Citizens of Hong Kong, Bhutan, Iran, Nepal, Sri Lanka[26], Pakistan, Bangladesh and Afghanistan cannot without the permission of the RBI must acquire or transfer property in India except of lease not more than five year. This provisions does not apply to OCI.
CHAPTER 6 – CASE STUDY OF RELIANCE JIO
INTRODUCTION
Reliance Jio Infocomm Limited was established in the year 2007. In the year 2010, it purchased 95% of Infotel Broadband Services Limited (IBSL). The reason for purchasing such less known company is the opportunities and services which is offered in the price tag. IBSL is thus one of the reason which permitted Reliance in developing 4G network all over the country. The first product which was launched in the year 2015 was Lyf smartphone and this product was highly hyped and advertised did not reach that point of expectations and failed in generating enough demand. In the year 2016 Ambani announced first his plans in taking over the 4G in India by the launch of Reliance Jio.
TAKING OVER THE MARKET
The starting scheme which accompanied the establishment of Jio was free services till the end of December 2016. In this scheme each person can access free SIM cards and data in fulfilling their browsing needs. Reaching 100 million subscribers in a period of 100 days was the target and such was aggressive marketing scheme. By the end of June 2017 the subscribers was almost double the number. In the year 2020 there was a huge number of subscribers which almost brought a large profit in the business. In the year 2019-20 the profits increased by 88% and also the revenue was increased by around 40%. The coronavirus pandemic the data usage on network increased approximately by 50%. In the starting of 2020, Relaince Industries Limited (RIL) had a total debt of around 1.61 crores. Debt burden increased over the years by 420% and interest was also raised by 691% but the profits earned were only 63%.
RIGHT ISSUE
With the plan in making Reliance full debt free by March 2021, he completed such target within 9 weeks. Through two sources the funds was raised. By the issuing of right issue i.e. offering of shares to the existing shareholders at a discount and such issue was oversubscribed by 1.59 times and raised more than 53 thousand crores. Secondly majority of funds came from the sale of stake in Jio platform. Total of 24.7% is sold to foreign investors such as Facebook (9.99%), Vista Equity Partner (2.32%), Silver Lake (2.08%), Public Investment Fund (2.32%), KKR (2.32%), Mubadala (1.85%), General Atlantic (1.34%), Abu Dubai Investment Authority (1.16%), TPG and L Catterton which have the stake of 0.93% and 0.39% respectively. An amount of Rs. 78,500 crores has been raised from such investors and the remaining is retained by Reliance industries.
OVERSEAS LISTING
An Initial Public Offer (IPO) of Jio by selling 20-25% is planned by Reliance Industries Limited (RIL) mostly in National Association of Securities Dealers Automated Quotations (NASDAQ) are been said in various reports. Indian Inc. is gaining a lot of transaction through overseas listing. For managing Indian start-ups as well as specialised sectors for raising capital by overseas efficiently, Finance Minister Nirmala Sitharaman had said that in permissible jurisdictions listing of securities can be directly done by the Indian public companies. After all necessary regulations permitting overseas directly by Indian entity will be expected soon after amendments are passed to the Foreign Exchange Management Act regulations and Companies Act. Currently Indian companies who are planning in raising funds in overseas stock markets are permitted to do so through American Depository Receipts (ADR) and Global Depository Receipts (GDR). The companies must have shares trading in domestic market complying with domestic market regulations. Most likely, Morgan Stanley will be appointed as the lead banker in managing overseas listing while Citibank and Bank of America Merril Lynch can also be roped for the IPO
When Reliance will start its listing process, New York Stock Exchange (NYSE) and NASDAQ wants such norms from companies who are wishing to list on their platforms-
- As per NYSE, a non-US company shall satisfy atleast one conditions: Company must have an average adjusted pre-tax income of $100 million (Rs. 750 crore) or more in last three financial years and also each of the two recent financial year shall have greater than $25 million (Rs. 190 crore) of pre-tax income also revenue must be $100 million (recent 12 month) and $75 million (Rs. 560 crore) for the recent financial year. Though, the company must have atleast 5000 shareholders globally and minimum 25 lakh shares must be held by public. Further the publicly held company must not have less than $60 million with a price of atleast $4 per share.
- Whereas as per NASDAQ, the company must have 12.5 lakh shares minimum with public. The company’s market value must not have less than $45 million with a price of atleast $4 per share. Company must have an average adjusted pre-tax income of $11 million (Rs. 80 crore) or more in last three financial years. Revenue must not be less than $110 million (Rs. 825 crore) for the recent financial year.
The exchanges have strict corporate governance regulations and rules on independent directors, audit committee, compensation to executive officers, code of conduct, nomination of directors, AGMs. A good demand of Jio can be seen during the time of IPO. It is likely to file IPO papers in 12 months.
CONCLUSION
Currently, Jio is the third largest mobile service provider in the world and the largest in India. Having a base of 400 million and is further growing in an impressive rate. Prices of RIL shares also increased gradually. It can be expected that the company will try in reducing other liabilities as well as focus on making its balance sheet stronger. The road further of RIL is bright with all the potential imbibed in the retail and telecom business. Big things are in plan by Reliance, and expecting the company in maintaining its status as one of the leaders in the Indian business.
CHAPTER 7 – SUGGESTION & CONCLUSION
7.1 SUGGESTION
In 1991, economic reforms were liberalised encouraging foreign investment in India which gave an upturn in the foreign exchange and by this the changing of “regulation” to “management” took place. The truth behind this is that certain provisions under Foreign Exchange Regulations Act, 1974 were strict towards the foreign exchange as well as import and export of currency, because of which a new act was formed because of the provisions which does not restrict majorly foreign exchange and also about the import and export currency gave rise to Foreign Exchange Management Act, 1999. The increase of foreign exchange over a period of time is bringing major changes in the economy. The foreign exchange reserves are currently up to $19 billion approx.
Increase in foreign exchange can be raised more if various sectors are made more flexible such as focusing on manufacturing sector which will have a growth in both infrastructure and also labour laws. The sectoral cap which is applied in various sectors over the years should be looked likely on insurance and such other important sector which is necessary. and encouraging more investment from automatic route even. By making the sectoral cap to 100% with automatic route in the construction development i.e. infrastructure, townships, housing is one of the positive things which is done. Encouraging more areas under automatic route and also reducing the delay in various procedures as well as various necessary approvals should also be focused on. Increase the foreign inflows is also required by some of the states in the country. Supporting and encouraging the Start-ups is necessary for the development in different sectors in India. Educational sector should also be kept in priority. Foreign exchange management act, 1999 and various regulations are amended as and when needed requirement. The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 thus gives a broad view with respect to the sectoral caps which are given in various sectors adding the entry routes as well the steps which needs to be followed by a FPI or any other investors whiling investing in India.
7.2 CONCLUSION
More than a decade after, the functions of Indian foreign exchange market brought good environment and is developing in a vast scale. Liberalising foreign exchange in a right manner as well as regulating properly is required to be monitored because then the financial certainty will not affect. Our Hon’ble Prime Minister’s vision for encouraging foreign exchange market in proper manner and bringing various new technology in several sectors as well as developing a country in such a manner that the inflow and the outflow of currency increases rapidly. Indian economy being a very vast market will be a developed country in some years and foreign investments will be in another level. The Reserve Bank of India even though having strict provisions towards the regulations of FEMA but it is required for approvals at all stages in specific sectors so that no contravention will take place and the procedure will be in a more systematic manner.
Replacing the old Act from i.e. Foreign Exchange Regulations Act, 1973 (FERA) to Foreign Exchange Management Act, 1999 (FEMA) aided in removing the defects i.e. provisions which was affecting the foreign market and encouraging investments in India as well as outside India. FEMA is one of the reasons in boosting the Indian economy and its flexibility being more with comparison to FERA brought various rules and regulations and the latest rule i.e. the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 which gave detailed rules with all the possible sectoral caps and its entry routes. Further the roles of Foreign Portfolio Investor, Foreign Venture Capital Investor, Non-Resident Indian while investing in India the steps to be followed also the transfer can be done by the manner which are stated in these rules. Further, the case study of Reliance Jio is a good example to understand the Initial Public Offer which can be done overseas market. Thus, the foreign exchange market is growing in a rapid manner and by various investments in India in different sectors brings more development in our country.
BIBLIOGRAPHY
A. PRIMARY SOURCES
1. Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
2. Foreign Exchange Management Act, 1999.
3. Foreign Exchange Regulations Act, 1973.
B. SECONDARY RESOURCES
ARTICLES
a. Rajkumar S. Adukia, “Fathoming FEMA (Overview of Provisions of Foreign Exchange Management Act, 1999 (FEMA) and Rules and Regulations there under), ICSI Chartered Secretary, (A-418 – A-433), (November 2011) https://icmai.in/upload/PPT_Chapters_RCs/Nagpur-23012016-Session-IV.pdf .
b. Nishith Desai, “Doing Business in India” Nishith Desai Associates 2020, (August 2020). https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Doing_Business_in_India.pdf
c. Abhishek Vijaykumar Vyas, “An Analytical Study of FDI in India”, International Journal of Scientific and Research Publications, Volume 5, Issue 10, ISSN – 2250- 3153, (October 2015).
http://www.ijsrp.org/research-paper-1015/ijsrp-p4631.pdf
d. Nishith Desai, “Investment Funds” Nishith Desai Associates, (January 31, 2020).
http://www.nishithdesai.com/newsid/pdf
WEBSITES
a. http://www.femaindia.in/
b. rbi.org.in
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d. http://indiakanoon.org
e. http://www.legalblog.in
f. https://www.lexology.com/library/detail.aspx?g=af6d48e1-f1e6-485c-b4ad-de3c012cca29
g. https://www.mondaq.com/india/inward-foreign-investment/881890/overview-on-the-non-debt-instruments-rules-2019-read-with-the-non-debt-instruments-amendment-rules-2019
h. https://www.finnovationz.com/blog/reliance-jio
i. https://www.thehindubusinessline.com/markets/stock-markets/jio-overseas-listing-what-does-the-us-bourse-rule-book-say/article31704331.ece
j. https://www.business-standard.com/article/companies/reliance-looks-at-nasdaq-listing-for-jio-platforms-ipo-likely-by-2021-120052700048_1.html
k. https://www.livemint.com/companies/news/mukesh-ambani-may-consider-overseas-ipo-for-jio-platforms-11590502364713.html
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[1] Rajkumar S. Adukia, “Fathoming FEMA (Overview of Provisions of Foreign Exchange Management Act, 1999 (FEMA) and Rules and Regulations there under) (A-418 – A-433) November 2011.
[2] Nishith Desai, “Doing Business in India” Nishith Desai Associates 2020, August 2020.
[3] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 4, Act of Parliament, 2019, (India).
[4] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 5, Act of Parliament, 2019, (India).
[5] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 6, Act of Parliament, 2019, (India).
[6] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 7, Act of Parliament, 2019, (India).
[7] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 8, Act of Parliament, 2019, (India).
[8] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 9, Act of Parliament, 2019, (India).
[9] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 2 (u), Act of Parliament, 2019, (India).
[10] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 10, Act of Parliament, 2019, (India).
[11] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 8, Act of Parliament, 2019, (India).
[12] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 12, Act of Parliament, 2019, (India).
[13] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 13, Act of Parliament, 2019, (India).
[14] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 17, Act of Parliament, 2019, (India).
[15] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 18, Act of Parliament, 2019, (India).
[16] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 19, Act of Parliament, 2019, (India).
[17]Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 21, Act of Parliament, 2019, (India).
[18] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 23, Act of Parliament, 2019, (India).
[19] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 24, Act of Parliament, 2019, (India).
[20] Companies Act, 2013, §2(77), Act of Parliament, 2013, (India).
[21] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 25, Act of Parliament, 2019, (India).
[22] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 27, Act of Parliament, 2019, (India).
[23] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 28, Act of Parliament, 2019, (India).
[24] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 29, Act of Parliament, 2019, (India).
[25] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 30, Act of Parliament, 2019, (India).
[26] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 31, Act of Parliament, 2019, (India).
Author Bio
Very lengthy and repetitive article instead of clarity and simplicity. Even bibliography is listed a line per rule instead simply calling these as rules 1 to 31. Nobody has called out the government of India as fixated on over regulation resulting in strangulation of business with India. The whole of FEMA needs to be abolished otherwise all business will run away from India.