FEMA Updates Foreign Exchange Management (Transfer or Issue of Security by a

Transcription

1 FEMA Updates Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 December 27, 2017 In Foreign Exchange Management Act, 1999 (FEMA) one of the significant regulations under is Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FDI Regulations 2000), which deals with foreign investment in India and provides for sectoral limits, pricing and reporting requirements etc. Reserve Bank of India (RBI), has notified on 7 th November 2017, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPROI Regulations 2017). The TISPROI Regulations 2017 has brought in major changes in connection with foreign investment in India by non-resident. The TISPROI has brought in few new concepts viz. defining FDI, Foreign Portfolio Investment, Listed Indian Companies etc. The brief of changes are summarized in this update. Khandhar Mehta & Shah Chartered Accountants

2 Definitions : TISPROI Regulations 2000 (As amended time to time) TISPROI Regulations 2017 Capital : It means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures and warrants. The equity shares shall include equity shares that have been partly paid. Preference shares and convertible debentures shall be required to be fully paid, and should be mandatorily and fully convertible. Further, warrant includes Share Warrant issued by an Indian Company in accordance to provisions of the Companies Act, as applicable. Capital Instrument : It means equity shares, debentures, preference shares and share warrants issued by an Indian company. Equity shares includes partly paid shares. Debentures includes fully, compulsorily and mandatorily convertible debentures. Preference shares includes fully, compulsorily and mandatorily convertible preference shares. Share Warrants are those issued by an Indian Company in accordance with the Regulations issued by the Securities and Exchange Board of India. Foreign Direct Investment (FDI) : It means investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations,2000. Foreign Direct Investment (FDI) : It means 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

3 TISPROI Regulations 2000 (As amended time to time) TISPROI Regulations 2017 Foreign Portfolio Investor (FPI) : It means a person registered in accordance with the provisions of Securities and Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulations, 2014, as amended from time to time. Overseas Citizen of India (OCI) : There was no formal definition. Foreign Portfolio Investment (FPI) : It means any investment made by a person resident outside India through capital instruments where such investment is less than 10 percent of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company. Overseas Citizen of India (OCI) : OCI means an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, Downstream Investment : It means indirect foreign investment, by an eligible Indian entity, into another Indian company/llp, by way of subscription or acquisition. Downstream Investment : It shall mean investment made by an Indian entity or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity

4 Issue and Transfer Of Capital Instruments : TISPROI Regulations 2000 (As amended time to time) TISPROI Regulations 2017 Earlier, transfer of such instruments by an NRI to a person resident outside India (other than NRI) required prior RBI approval (irrespective of whether NRI held such instrument on repatriation or non-repatriation basis). A Non-resident Indian (NRI) or an Overseas Citizen of India (OCI) holding capital instrument of an Indian company on repatriation basis (under automatic route) may transfer the same by way of sale or gift to any person resident outside India subject to prescribed conditions. Issue of Shares : General permission was available to issue shares to a person resident outside India upon merger/ demerger /amalgamation, subject to prescribed conditions. Issue of Capital Instruments : Indian companies can now issue any capital instrument pursuant to merger/ demerger/ amalgamation, subject to prescribed conditions. Transfer of Capital Instrument : Further, any transfer of capital instrument of an Indian company by a person resident outside India to any person resident outside India pursuant to liquidation, merger, demerger and amalgamation of entities outside India will be permitted under automatic route of RBI unless the Indian company is engaged in a sector requiring government approval.

5 TISPROI Regulations 2000 (As amended time to time) TISPROI Regulations 2017 Issue of Shares Against Swap: An Indian company can only issue equity and fully convertible preference shares under automatic route Purchase/Sale Of Listed Indian Company: There was no formal condition. Issue Of Shares Against Pre-incorporation/ Preoperative Expenses : An Indian company can now under automatic route, issue any capital instruments to a person resident outside India against swap of capital instruments if the Indian investee company is engaged in a sector covered under automatic route. An investment vehicle is also allowed to issue its units to a person resident outside India against swap of capital instruments of a Special Purpose Vehicle (SPV) proposed to be acquired by such investment vehicle. A person resident outside India may purchase capital instruments of a listed Indian company on a stock exchange in India subject to prescribed conditions. Indian company including wholly owned subsidiary may issue shares against pre-incorporation/ preoperative expenses with Government approval. A wholly owned subsidiary set up in India may issue capital instruments against pre-incorporation/ preoperative expenses incurred by the non-resident entity up to a limit of 5% of its authorized capital or USD 500,000 whichever is less, subject to the prescribed conditions. Indian company other than wholly owned subsidiary may issue shares against pre-incorporation/ preoperative expenses with Government approval.

6 Point of Difference Changes having Impact On M&A Transactions : Foreign Capital (FVCI) : Venture Investor Rate of Dividend on Preference Shares : Delay in Reporting: TISPROI Regulations 2000 (As amended time to time) Earlier, it was compulsory to take NOC from income tax Authority for issuance of bonus, non-convertible redeemable preference shares or debentures by an Indian company. Pledge of unlisted shares in favour of NBFCs was permitted with specific RBI approval. FVCI can invest only in equity or equity linked instruments or debt instruments. The rate of dividend on preference shares or convertible preference shares shall not exceed 300 basis points over the Prime Lending Rate (PLR) of SBI. To Regularize the delay in reporting under FDI Regulations, application for compounding is required to be filed with RBI. TISPROI Regulations 2017 In case of issuance of bonus, non-convertible redeemable preference shares or debentures (as part of a scheme of arrangement) by an Indian company, the requirement for obtaining NOC from income-tax authority has been done away with. After the authorized dealer is satisfied,nr are now permitted to pledge unlisted shares in favour of NBFCs without a specific RBI approval. FVCIs can invest in securities issued by Indian company engaged in specified sectors / startups. Further, FVCIs are now permitted to invest in non-convertible instruments and are also permitted to directly repatriate sale proceeds offshore. The cap on rate of dividend on preference shares or convertible capital instruments removed. In case of delay in reporting as provided under FDI Regulations 2017, RBI to prescribe late payment fee in consultation with CG. Accordingly, delay in reporting may not require compounding application to be filed with RBI.

7 Point of Difference Time limit for issue of shares: Refund of share subscription money: Remittance Of Sale Proceeds Of A Security Outside India : TISPROI Regulations 2000 (As amended time to time) Capital instruments shall be issued to the person resident outside India making such investment within 180 days from the date of receipt of the consideration. Where capital instruments are not issued with in prescribed time limit (180 days) the amount of consideration so received should be refunded immediately to the non-resident investor. AD bank can allow the remittance of sale proceeds of a security (net of applicable taxes) subject to availability of NOC / tax clearance certificate from the Income Tax Department and fulfillment of other conditions. TISPROI Regulations 2017 Capital instruments shall be issued to the person resident outside India making such investment within 60 days from the date of receipt of the consideration. In case of partly paid equity shares, 60 days shall be reckoned from the date of receipt of each call payment. Where capital instruments are not issued with in prescribed time limit (60 days) the consideration shall be refunded to the person concerned within fifteen days from the date of completion of sixty days. Provided Prior approval of the RBI shall be required for payment of interest, if any, as laid down in the Companies Act, 2013, for delay in refund of the amount so received. Remittance of sale proceeds of a security outside India allowed without the requirement of obtaining NOC or tax clearance certificate from income tax authority, subject to payment of applicable taxes and other duties/levies in India.

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