Reserve Bank of India (RBI) has recently issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (New FDI Regulations) in supersession of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Erstwhile FDI Regulations) as amended from time to time.

This piece of framework released by RBI is more akin to that of reassessment, consolidation and simplification of the Erstwhile FDI Regulations read with its numerous amendments/ clarifications/ press release in a time span of 17 years. The New FDI Regulations have now been aligned with the existing Companies Act 2013 and SEBI Laws in order ensure strict adherence to legal provisions and outdo the ambiguity. The facile and uncomplicated approach in these new regulations has grabbed the attention of not only the professionals but also the industry people all over the nation.

The key changes brought about in the FDI Regime through the New FDI Regulations have been set out hereinbelow:

1. Definition section
1. The definition of ‘Capital Instruments’ have been introduced with a view to provide precision on the subject. Earlier, the respective instruments were traceable at different part of the Erstwhile FDI Regulations, however, the New FDI Regulations, while providing an exhaustive definitions, have clarified that the following shall mean as Capital Instruments:
• Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid
• Debentures means fully, compulsorily and mandatorily convertible debentures.
• Preference shares means fully, compulsorily and mandatorily convertible preference shares.
• Share Warrants are those issued by an Indian Company in accordance with the Regulations issued by the SEBI.

It has also been elucidated that the consideration for partly paid up shares and share warrants should be called up/ received with 12 months and 18 months respectively, from the date of their issue.

2. The term on which the whole New FDI Regulations have been founded, ‘Foreign Direct Investment’ has been defined to mean investment through Capital Instruments by a person resident outside India in an unlisted Indian company; or in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

Thus, the term has been perspicuously explained to do away with any confusion that might arise in the transactions. It is to be taken note that such term is to be construed with reference to Indian Company, whether listed or unlisted.

3. Unlike the Old FDI Regulations, the term ‘Foreign Investment’ has secured its position in the definition part of the New FDI Regulations. Being an exhaustive definition, it means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP.

Thus, it has been clarified that the term ‘Foreign Investment’ shall be made only on repatriable basis i.e any investment made by Person resident outside India on non-repatriable basis shall be dealt differently and is considered at par with the domestic investments. Further, such term is to be construed with reference to Indian Company as well as LLP. Also, as the name suggests, it may either be direct or indirect.

4. The meaning of the term ‘Foreign Portfolio Investment’ has also been introduced under the New FDI Regulations to mean any investment made by a person resident outside India through capital instruments where such investment is less than 10 % of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10 % of the paid up value of each series of capital instruments of a listed Indian company.

It is to be noted that the 10 % limit for foreign portfolio investors shall be applicable to each foreign portfolio investor or an investor group as referred in Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.

5. For an entity to be considered as a ‘Startup Company’ under the New FDI Regulations, it is obliged not only to be registered as such under the relevant law but also is mandated to comply with the conditions laid in this respect.

Earlier, the compliance of the directions issued by respective authorities was not a condition precedent for an entity to be treated as a ‘Startup Company’. 

6. The definition of ‘Sweat equity shares’ has now been aligned with the Companies Act, 2013.
7. The term ‘Pre-incorporation/ pre-operative expense’ has though not defined in the definition part of the regulations but has been clarified in the form of an explanation in schedule 1 to New FDI Regulations.

Pre-incorporation/ pre-operative expenses shall include amounts remitted to Investee Company’s account, to the investor’s account in India if it exists, to any consultant, attorney or to any other material/ service provider for expenditure relating to incorporation or necessary for commencement of operations

8. Certain new definitions have been incorporated in the New FDI Regulations, which though trivial, are able to provide unimpeded analysis of the legal terminology, viz. Escrow Account, Foreign Portfolio Investor, Sectoral Cap, etc.
2. Valuation of capital instruments

Under the Erstwhile FDI Regulations, the valuation of the capital instruments should be done by Chartered Accountant or a SEBI registered Merchant Banker, in case of an unlisted Indian company.

The New FDI Regulations have, in addition to the above, authorized the practicing Cost Accountant for valuation of the capital instruments of the unlisted Indian company.

3. Timeline for issuance of capital instruments

This provision has now been aligned with the requirements mentioned under the Companies Act, 2013. The capital instruments shall be issued to the person resident outside India making such investment within 60 days from the date of receipt of consideration.

Earlier, a time-period of 180 days was given for making such issue.

4. Refund in case of non-issuance of capital instruments

Where such capital instruments are not issued within sixty days from the date of receipt of the consideration the same shall be refunded to the person concerned by outward remittance within fifteen days from the date of completion of sixty days.

Earlier,  a time-period of 180 days was given for making such refund.

5. Transfer of capital instruments or units by person resident outside India (excluding NRI/OCI/OCB) to person resident outside India

A person resident outside India (excluding NRI/OCI/OCB), may transfer the capital instruments or units to any person resident outside India. However, such transfer shall require a condition precedent to be fulfilled, viz:

Where the person resident outside India is an FPI and the acquisition of capital instruments has resulted in a breach of the applicable aggregate FPI limits or sectoral limits, the FPI shall sell such capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by Reserve Bank in consultation with the Central Government. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale shall not be reckoned as a contravention under these Regulations provided the sale is within the prescribed time limit.

However, this provision shall be effective on a later date to be notified by RBI in this regard.

6. Condition precedent for transfer of capital instruments or units by NRI/ OCI to person resident outside India

Similar conditions as mentioned above shall required to be fulfilled in case of transfer of capital instruments or units by NRI/ OCI to person resident outside India

However, this provision shall be effective on a later date to be notified by RBI in this regard.

7. Pledge of shares by person resident outside India

In case of pledge of shares by person resident outside India, the conditions were very perplexed. Under the new framework, these perplexities have now been abridged to a greater extent. The pledge may now be made in favour of Indian bank, overseas bank or an NBFC in India, as the case may be.

8. Non-applicability of pricing guidelines for investment on non-repatriation basis

Although there is no change in the pricing guidelines in the Erstwhile and New FDI Regulations, one very significant clarification that may be overlooked by many is made in Regulation 11(6) of the latter. The new regulations expressly state that the pricing guidelines shall not be applicable for investment in capital instruments by person resident outside India on non-repatriation basis.

9. Prior approval in Foreign Portfolio Investments

Foreign Portfolio Investments upto 49% of the paid-up capital on a fully diluted basis or the relevant sectoral/ statutory cap, whichever is lower, shall not require RBI approval, if the following condition is satisfied:

• Investment does not result in transfer of ownership and control of the Indian resident company from resident Indian citizens to person resident outside India, or
• Transfer of control or ownership to person resident outside India

i.e The approval of Government shall be required in case the Foreign Portfolio Investment above the prescribed limit results in transfer of ownership and control or ownership or control from resident Indian citizens to  person resident outside India.

10. Reclassification of FDI in case of Foreign Portfolio Investment

In case the total holding of an Foreign Portfolio Investor increases to 10 % or more of the total paid-up equity capital on a fully diluted basis or 10 % or more of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company, the total investment made by the FPI shall be re-classified as FDI subject to the conditions as specified by SEBI and RBI. The reporting requirements prescribed in the New FDI Regulations shall also have to be complied with.

The term ‘Fully Diluted Basis’ means the total number of shares that would be outstanding if all possible sources of conversion are exercised.

This provision was not present in the Erstwhile FDI Regulations. Further, the term ‘Fully Diluted Basis’  has been used in several places in New FDI Regulations in connection with the Foreign Portfolio Investors.

11. Foreign Investment in company engaged in investment activity

Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian companies, will require prior approval of the RBI.

12. Investment into an Indian company not having any operation

An Indian company which does not have any operations and also has not made any downstream investment may receive investment in its capital instruments from persons resident outside India under automatic route for undertaking activities which are under automatic route and without FDI linked performance conditions.

Under the Erstwhile FDI Regulations, the approval of FIPB was required to make such investment.

13. Transactions reckoned as transfer in relation to real estate

Unlike the Erstwhile FDI Regulations, the following transactions shall be considered as transfer in relation to real estate:

• the sale, exchange or relinquishment of the asset; or
• the extinguishment of any rights therein; or
• the compulsory acquisition thereof under any law; or
• any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or
• any transaction, by acquiring capital instruments in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property.
14. Contribution to capital of a firm or proprietary concern

Under the New FDI Regulations, an NRI or an OCI (Overseas Citizen of India) have been permitted to invest by way of contribution to the capital of a firm or a proprietary concern in India. Such firm or a proprietary concern should not be engaged in any agricultural/ plantation activity or print media or real estate business. Further, the investment should be made on non-repatriation basis.

Erstwhile FDI Regulations were silent on such issue.

15. Reporting requirements

The provisions with respect to reporting requirements pursuant to New FDI Regulations have been mentioned as under:

1. The timeline for reporting the transfer of capital instruments between a person resident in India and a person resident outside India in Form FC-TRS shall be within 60 days from transfer of capital instruments or receipt/ remittance of funds, whichever is earlier.

Earlier, the said time period was counted from date of receipt or payment of the amount of consideration, as the case may be.

2. In case of transfer between person resident outside India holding capital instruments on repatriable basis and person resident outside India holding capital instruments on non-repatriable basis, the onus of reporting shall be on the latter.
3. The transfer of capital instruments between person resident outside India holding such capital instruments on non-repatriable basis and person resident in India is not required to be reported in Form FC-TRS.
4. An Indian Company making downstream investment in another Indian company which is considered as an indirect foreign investment for the investee company shall notify the Secretariat for Industrial Assistance, DIPP and file Form DI within 30 days of such investment.

Contrary to this, the Consolidated FDI Policy, 2017 has mandated the intimation of downstream investment to RBI as well as Foreign Investment Facilitation Portal at www.fifp.gov.in. However, the new legislation has done away with the intimation requirement to RBI. In addition, new form has also been prescribed, though the particulars are yet to be notified.

5. For reporting the issuance/ transfer of convertible notes of an Indian startup company, Form CN has been prescribed which shall be reported to the AD bank within 30 days of such issuance or transfer, as the case may be.

The Erstwhile FDI Regulations vide notification issued earlier this year came up with the concept of convertible notes. The startup company was obliged to furnish reports as may be prescribed to RBI, however, nothing was prescribed till the date of New FDI Regulations.

The reporting requirements as required under the New FDI Regulations are presented herewith as Annexure A.

16. Late submission fee

Now, any delay in filing the reports as required under the New FDI Regulations shall entail the payment of late submission fee, as may be decided by RBI in consultation with Central Government.

Annexure A

Reporting Requirements