RBI revamps FDI Regulations

Transcription

1 RBI revamps FDI Regulations By CS Vinita Nair, Partner Vinod Kothari & Company RBI vide notification No. FEMA 20(R)/ 2017-RB dated 7 th November 2017 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, (hereinafter referred as Regulations, 2017 ) in supersession of Notification No. FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB both dated May 3, 2000, Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (hereinafter referred as Regulations, 2000 ). The Regulations, 2017 will be effective from 8th November 2017 (Date of publication in the Official gazette) except proviso (ii) to sub-regulation 1 of regulation 10 of these Regulations and proviso (ii) to sub-regulation 2 of regulation 10 of these Regulations, reproduced hereunder as Annexure 1, which will come into effect from a date to be notified. Master Direction on Foreign Investment in India (MD-FDI) was issued by RBI on January 4, which compiles instructions issued on Foreign Investment in India and its related aspects under the FEMA. This article discusses the key amendments made in Regulations, 2017 including Schedules. Further, additional clarifications provided in MD-FDI have also been highlighted hereunder for ease of reference. Definitions inserted/ amended in Regulation 2 Key Definitions inserted/ amended Capital instrument means equity shares, debentures, preference shares and share warrants, issued by an Indian Company; Explanation: (a) Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid. The expression Debentures means fully, compulsorily and mandatorily convertible debentures. Preference shares means fully, compulsorily and mandatorily convertible preference shares. Our Analysis The corresponding definition of Capital under Regulations, 2000 provided as under: Capital means equity shares, preference shares and convertible debentures; Explanation: The equity shares issued in accordance with the provisions of the Companies Act, as applicable, shall include equity shares that have been partly paid. Preference shares and convertible debentures shall be required to be fully paid, mandatorily and fully convertible

2 Key Definitions inserted/ amended Share Warrants are those issued by an Indian Company in accordance with the Regulations issued by the Securities and Exchange Board of India. Capital instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price. (b) Partly paid shares that have been issued to a person resident outside India shall be fully called-up within twelve months of such issue. Twenty five percent of the total consideration amount (including share premium, if any), shall be received upfront. (c) In case of share warrants at least twenty five percent of the consideration shall be received upfront and the balance amount within eighteen months of issuance of share warrants. (d) Capital instruments shall include non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 shall be treated as debt and shall conform to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, (xxvii) Investment means to subscribe, acquire, hold or transfer any security or unit issued by a person resident in India; Explanation: (a) This will include to acquire, hold or transfer depository receipts issued outside India, the underlying of which is a security issued by a person resident in India. Our Analysis While the base definition remains intact, the definition of Capital Instruments under Regulations, 2017 expressly provides that warrants can be issued to a person resident outside India only in accordance with the Regulations issued by SEBI i.e. ICDR Regulations. Therefore, unlisted companies/ debt listed companies cannot issue warrants to person resident outside India. Formerly, Section 114 and 115 of Companies Act, 1956 provided for issue of share warrants. Corresponding provisions were not inserted in Companies Act, Accordingly, following definition of Warrants provided in Regulations, 2000 has also been deleted: (xib) Warrant includes Share Warrant issued by an Indian Company in accordance to provisions of the Companies Act, as applicable. Such warrants shall be treated as security within the meaning of Section 2(za) of FEMA, Regulations, 2000 referred to purchase or transfer. Regulations, 2017 defines investment to include all possible means of acquisition as well as transfer of security or unit by person resident outside India and explains the meaning in case of depository receipts and investment in LLP. (b) For the purpose of LLP, investment shall mean capital contribution or acquisition/ transfer of profit shares.

3 Key Definitions inserted/ amended (xvii) Foreign Direct Investment (FDI) 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; Note: In case an existing investment by a person resident outside India in capital instruments of a listed Indian company falls to a level below 10 percent of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI. Explanation: Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised Our Analysis The definition segregates investment made in unlisted Indian company and listed Indian company. Listed Indian Company means an Indian company which has any of its capital instruments listed on a recognized stock exchange in India and the expression Unlisted Indian Company shall be construed accordingly; Therefore any investment made by person resident outside India in an unlisted Indian company or Debt listed Indian Company (having NCDs or NCRPS listed) will be regarded as FDI. However, in case of listed Indian Company has been segregated based on the quantum of investment made as a percentage of post issue paid-up equity capital on a fully diluted basis i.e. after giving effect to all possible conversions, eg. ESOPs, CCDs issued, Loan agreements having optionality clause etc. Investment in in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company shall be regarded as FDI. xviii) Foreign Investment 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; Explanation: If a declaration is made by persons as per the provisions of the Companies Act, 2013 about a beneficial interest being held by a person resident outside India, then even though the investment may be made by a resident Indian citizen, the same shall be counted as foreign investment. Anything less than that will be regarded as Foreign Portfolio Investment (Refer definition below). The definition adequately clarifies that investments made on non-repatriable basis will be regarded as domestic investment. NRIs are particularly eligible to make investments on a non-repatriable basis. These investments were treated at par with investments made by residents.

4 Key Definitions inserted/ amended Our Analysis Note: A person resident outside India may hold foreign investment either as Foreign Direct Investment or as Foreign Portfolio Investment in any particular Indian company. (xix) Foreign Portfolio Investment 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; Explanation: The 10 percent 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 (xxxvii) Resident Indian citizen means an individual who is a person resident in India and is citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955; (xxxv) Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India; (xxxvi) Overseas Citizen of India (OCI) means an individual resident outside India who is registered as an SEBI (FPI) Regulations, 2014 defines Foreign Portfolio Investor. As per Regulation 21 (1) (a) of FPI Regulations provides that FPIs can invest in securities in the primary and secondary markets including shares, debentures and warrants of companies, listed or to be listed on a recognized stock exchange in India; Further, Regulation 21 (7) of FPI Regulations provides that the purchase of equity shares of each company by a single foreign portfolio investor or an investor group shall be below ten percent of the total issued capital of the company. The maximum permissible investment is provided under Schedule 2 of Regulations, As per the definition of Foreign Portfolio Investment given in Regulations, 2017 any investment 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 will not be regarded as FDI. As per Consolidated FDI Policy, 2017 Resident Indian Citizen shall be interpreted in line with the definition of person resident in India as per FEMA, 1999, read in conjunction with the Indian Citizenship. The term person resident in India has been defined in FEMA Act. Regulations, 2000 defined NRI as an individual resident outside India who is citizen of India or is an Overseas Citizen of India cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.

5 Key Definitions inserted/ amended Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955; Our Analysis The said definition has been split into two and accordingly reference has been made throughout Regulations, Definitions aligned with Act, 2013/ DIPP notifications/ Consolidated FDI Policy Definitions aligned (x) Employees stock option (ESOP) means an ESOP as defined under the Companies Act, 2013 and issued under the regulations issued by the Securities and Exchange Board of India. (xli) Startup means an entity which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India; Our Analysis Aligned with Act, Linked to Notification issued by DIPP. (xlii) Startup company means a private company incorporated under the Companies Act, 2013 and recognized as such in accordance with notification number G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India and complies with the conditions laid down by it; (xliii) Sweat equity shares means sweat equity shares as defined under the Companies Act, 2013; Other definitions inserted includes that of Authorized Bank, Authorized Dealer, FDI linked performance conditions, Aligned with Act, 2013 Definitions deleted Definition of Foreign Institutional Investor and Qualified Foreign Investor has been deleted in view of their inclusion as Foreign Portfolio Investor; Definition of Warrants has been deleted as Regulations, 2017 only permit issuance of warrants in accordance with SEBI (ICDR) Regulations.

6 Limits prescribed based on total paid-up equity capital on a fully diluted basis Regulations, 2000 did not specify for computing limits as a percentage of the total paid-up equity capital on a fully diluted basis. Regulations, 2017 expressly provides in the definition of FDI, Foreign Portfolio Investment and in other relevant provisions to consider total equity paid up capital on a fully-diluted basis. FDI v/s Foreign Portfolio Investment In case of Listed Indian Company, any investment that is less than 10 percent of the 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 shall be regarded as Foreign Portfolio Investment. Where the investment increases to 10 percent or more of the total paid-up equity capital on a fully diluted basis or 10 percent 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 Securities and Exchange Board of India and the Reserve Bank in this regard and the investee company and the investor complying with the reporting requirements prescribed in regulation 13 of these Regulations. Aggregate Foreign Portfolio Investment up to 49 percent of the paid-up capital on a fully diluted basis or the sectoral/ statutory cap, whichever is lower, will not require Government approval or compliance of sectoral conditions as the case may be, if such investment does not result in transfer of ownership and control of the resident Indian company from resident Indian citizens or transfer of ownership or control to persons resident outside India. Other investments by a person resident outside India will be subject to conditions of Government approval and compliance of sectoral conditions as laid down in these regulations. MD-FDI provides that for arriving at the ceiling on holdings of FPI, capital instruments acquired both through primary as well as secondary market will be included. However, the ceiling will not include investment made by the FPI through off-shore Funds, Global Depository Receipts and Euro-Convertible Bonds. Downstream Investments While the provisions remain similar to that provided in Regulations, 2000 the insertion has been as under: The downstream investment should have the approval of the Board of Directors as also a Shareholders' Agreement, if any; With effect from 31st day of July, 2012, downstream investment/s made under Corporate Debt Restructuring (CDR), or other loan restructuring mechanism, or in trading book, or

7 for acquisition of shares due to defaults in loans, by a banking company, as defined in clause (c) of section 5 of the Banking Regulation Act, 1949, incorporated in India, which is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India, shall not count towards indirect foreign investment. However, their strategic downstream investment shall be counted towards indirect foreign investment for the company in which such investment is being made. As per Regulations, 2017 the Indian entity making the downstream investment that is treated as Indirect Foreign Investment for the investee Indian entity is required to bring in the requisite funds from abroad and not use funds borrowed in the domestic markets. The condition was similar under Regulations, MD-FDI further clarifies that Subscription by persons resident outside India to nonconvertible debentures issued by an Indian company will not be construed as funds borrowed/ leveraged in the domestic market. However, raising of debt and its utilisation will have to comply with the Act and the rules or regulations made thereunder. As per Regulations, 2017 capital instrument of an Indian company held by another Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India may be transferred to: i. A person resident outside India, subject to reporting requirements in Form FCTRS; MD-FDI clarifies that pricing guidelines will not apply for such a transfer. ii. A person resident in India subject to adherence to pricing guidelines. iii. An Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India. MD-FDI clarifies that pricing and reporting guidelines will not apply for such a transfer. Uploading details of permitted foreign investments MD-FDI mandates Indian companies that have foreign investment to upload their total foreign investment limits and permissible aggregate/ sectoral limits on portals of the Indian depositories. Headroom available for proximate scrips would be displayed on the sites of the depositories and exchanges. This shall come into effect from the date the second proviso to sub-regulation (1) of Regulation 10 of Regulations, 2017 is notified in the gazette of India.

8 Clarity is needed in terms of applicability to companies that are FOCC however, the shares are not held in dematerialized form. Whether, such companies are also required to intimate, if yes, then to both the depositories or any one of them. Transfer of shares In line with Regulations, 2000 the present Regulations also provide for transfer by way of sale or gift of capital instruments/ units of an investment vehicle by and between: PROI to PROI [Regulation 10 (1)]; In case of transfer of capital instruments by a person resident outside India to another person resident outside India by way of sale or gift, where the person resident outside India is an FPI and the acquisition of capital instruments made under Schedule 2 of Regulations, 2017 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, provided the sale is within the prescribed time limit, shall not be reckoned as a contravention under these Regulations. The guidelines issued by Securities and Exchange Board of India in this regard shall be applicable. (Not enforced yet) o MD-FDI provides that where the acquisition by FPI results in breach of aggregate FPI Limits or sectoral limits, the FPI is required to sell such capital instruments within five trading days after settlement to a person resident in India eligible to hold such instruments. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale, provided the sale is within the prescribed five trading days after settlement, will not be reckoned as a contravention under FEMA 20(R). The guidelines issued by SEBI in this regard shall be applicable. This shall come into effect from the date the second proviso to sub-regulation (1) of Regulation 10 of Regulations, 2017 is notified in the gazette of India. NRI/ OCI to any PROI [Regulation 10 (2)]. Regulations, 2000 mandated transfer to another NRI only; Where the acquisition of capital instruments by an NRI or an OCI under the provisions of Schedule 3 of these regulations has resulted in a breach of the applicable aggregate NRI/ OCI limit or sectoral limits, the NRI or the OCI 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

9 Government. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale, provided the sale is within the prescribed time, shall not be reckoned as a contravention under these Regulations. (Not enforced yet) o MD-FDI provides that where the acquisition by NRI/ OCI results in breach of aggregate NRI/ OCI limits or sectoral limits, the NRI/ OCI is required to sell such capital instruments within five trading days after settlement to a person resident in India eligible to hold such instruments. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale, provided the sale is within the prescribed five trading days after settlement, will not be reckoned as a contravention under FEMA 20(R). The guidelines issued by SEBI in this regard shall be applicable. This shall come into effect from the date the second proviso to sub-regulation (2) of Regulation 10 of Regulations, 2017 is notified in the gazette of India. PROI to PRII [Regulation 10 (3)]; PRII to PROI by way of sale [Regulation 10 (4)]; MD-FDI clarifies that In case of transfer of capital instruments of a company in the financial sector from a resident to a person resident outside India, 'fit and proper/ due diligence' requirement as regards the non-resident investor as stipulated by the respective financial sector regulator shall have to be complied with by the AD bank. PRII or NRI/ OCI (eligible investor under Schedule 4 i.e. on non-repatriation basis) by way of gift, with prior approval of RBI [Regulation 10 (5)]; NRI/ OCI (eligible investor under Schedule 4 i.e. on non-repatriation basis) by way of gift to an NRI/ OCI (eligible investor under Schedule 4 i.e. on non-repatriation basis) [Regulation 10 (6)] on a non-repatriable basis; Exit by PROI with optionality clause, without any assured return [Regulation 10 (7)]; Transfer by erstwhile OCBs shall be as per directions issued by RBI [Regulation 10 (8)]; PRII to PROI with payment of an amount not exceeding 25% of total consideration on deferred basis [Regulation 10 (9)]; PRII to PROI where an escrow account is opened by PROI [ Regulation 10 (10)]; Creation of pledge in favour of recognized lender in case of ECB, bank in India, overseas bank, NBFC registered with RBI [Regulation 10 (12)]; Onus of Reporting transfer in FC-TRS Regulations, 2000 laid the onus of submission of the form FC-TRS within the specified time on the transferor / transferee, resident in India Regulations, 2017 lays onus on the resident transferor/ transferee or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be. In case of

10 transfer under Regulation 10 (9), the onus of reporting shall be on the resident transferor/ transferee. Reporting under Regulations, 2017 FDI Reporting requirements under Regulations, 2017 are as under: Form Purpose To be filed with Timeline Advance Remittance Form (ARF): Reporting of amount of consideration received for issue of capital instruments and where such issue is reckoned as Foreign Direct Investment. Regional Office Form Foreign Currency- Gross Provisional Return (FC- GPR): Annual Return on Foreign Liabilities and Assets (FLA): Form Foreign Currency- Transfer of Shares (FC- TRS) Reporting of capital instruments issued to a person resident outside India and where such issue is reckoned as Foreign Direct Investment. Issue of participating interest/ rights in oil fields shall be reported Form FC-GPR Annual reporting by Indian company which has received FDI or LLP which has received capital contribution in the previous year(s) including the current year For following transfers: PROI (RB) to PROI (NRB) 3 ; PROI (RB) to PRII 4 ; PROI (NRB) to PRII need not be reported; By PROI on RSE 5 Between PRII and PROI under Regulation 10 (9) 6 ; Participating interest/ rights in oil fields concerned of RBI under whose jurisdiction the Registered office of the company operates Regional Office concerned of RBI under whose jurisdiction the Registered office of the company operates RBI (done vide ) Within 30 days from date of receipt. Within 30 days from date of issue of capital instruments/ participating interest/ rights in oil fields on or before the 15th day of July of each year. Authorised Dealer Bank Within sixty days of transfer of capital instruments or receipt / remittance of funds whichever is earlier. In case of transfer as per Regulation 10 (9), reporting to be done 3 PROI Person Resident Outside India; RB Repatriation basis; NRB Non Repatriation Basis. 4 PRII- Person Resident In India 5 RSE Recognised Stock Exchange 6 (9) In case of transfer of capital instruments between a person resident in India and a person resident outside India, an amount not exceeding twenty five percent of the total consideration (a) can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement; or (b) can be settled through an escrow arrangement between the buyer and the seller for a period not exceeding eighteen months from the date of the transfer agreement; or (c) can be indemnified by the seller for a period not exceeding eighteen months from the date of the payment of the full consideration, if the total consideration has been paid by the buyer to the seller. Provided the total consideration finally paid for the shares shall be compliant with the applicable pricing guidelines.

11 Form Purpose To be filed with Timeline on receipt of every tranche of payment. Form Employees Stock Option (ESOP): Form Depository Receipt Return (DRR): Form LLP (I): Form (II): LEC(FII): LLP LEC(NRI): Downstream Investment (Form DI) Form Convertible Notes (CN): An Indian company issuing employees stock option to persons resident outside India. Reporting of issue/ transfer of depository receipts issued in accordance with the Depository Receipt Scheme, 2014 by the Domestic Custodian. LLP receiving amount of consideration for capital contribution and acquisition of profit shares Disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) Purchase/ transfer of capital instruments by FPIs to be reported by Authorised Dealer Category I banks Purchase/ transfer of capital instruments by Non-Resident Indians or Overseas Citizens of India to be reported by Authorised Dealer Category I banks An Indian company making downstream investment in another Indian company which is considered as indirect foreign investment for the investee company. Issue of CN to a PROI by an Indian startup company; or Transfer of CN to or from PROI. Regional Office concerned of RBI under whose jurisdiction the Registered office of the company operates RBI within 30 days from the date of issue of employees stock option. within 30 days of close of the issue. Regional Office of the within 30 days from RBI under whose the date of receipt jurisdiction the of the amount of Registered Office of the consideration LLP is situated, Authorised Dealer Bank within 60 days from the date of receipt of funds RBI No timeline specified. RBI Secretariat for Industrial Assistance, DIPP Authorised Dealer bank No timeline specified. within 30 days of such investment and, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures (with/without expansion programme within 30 days of such transfer

12 Note: The format, periodicity and manner of submission of such reporting shall be as prescribed by Reserve Bank in this regard. Unless otherwise specifically stated in these regulations all reporting shall be made through or by an Authorised Dealer bank, as the case may be. Delayed reporting of FDI can be made with payment of late submission fee Regulations, 2000 did not provide anything on filing of documents beyond time. As per Master Direction on Compounding of Contraventions under FEMA, 1999, RBI had inter-alia delegated the power to Regional Offices to compound the contravention in relation to: Delay in reporting inward remittance received for issue of shares; Delay in filing form FC(GPR) after issue of shares; Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA Return), by all Indian companies which have received Foreign Direct Investment in the previous year(s) including the current year; Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident; Delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident. Master Direction on Reporting under FEMA, 1999 provides following: o Investment by FVCIs is also required to be reported in Forms ARF and FC-GPR and transfer of capital instruments between an FVCI and a person resident in India is required to be filed in Form FC-TRS. Since pricing guidelines are not applicable for Schedule 7 investments, valuation certificate need not be insisted upon. o Late Submission Fee (LSF) shall be applicable for the transactions undertaken on or after November 7, The payment of LSF is an option for regularising reporting delays without undergoing the compounding procedure. o Amount of LSF: Amount involved in reporting (in INR) Late Submission Fee (LSF) as % of amount involved* Maximum amount of LSF applicable Upto 10 million 0.05% INR 1 million or 300% of the amount involved, whichever is lower. More than 10 million 0.15% INR 10 million or 300% of the amount involved, whichever is lower. The % of LSF will be doubled every twelve months

13 o Manner of computation of LSF: For calculating the LSF amount, the period of contravention shall be considered proportionately {(approx. rounded off to next higher month 12) X amount for 1 year}. For the purpose of calculation, the period shall begin from the day after the 30th day (from the date of receipt of funds/ allotment or transfer of shares) and end on the day preceding the day on which the transaction report is received in the Reserve Bank The date of reporting to the AD bank shall be deemed to be the date of reporting to the Reserve Bank provided the prescribed documentation is complete in all respects. In case the reporting form (whether in physical or electronic form) is incomplete then the delay will continue till such time the form is received complete in all respects o The LSF may be paid by way of a demand draft drawn in favour of Reserve Bank of India and payable at the Regional Office concerned. Valuation can be done by practicing Cost Accountant In case of an unlisted Indian company, the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm s length basis can be certified by a practicing Cost Accountant. Issue of capital instruments within 60 days Para 2 (2) of Schedule 1 provides that Capital instruments shall be issued to the person resident outside India making such investment within sixty days from the date of receipt of the consideration. In case of partly paid equity shares, the period of 60 days shall be reckoned from the date of receipt of each call payment. Regulations, 2000 mandated issuance within 180 days from receipt of inward remittance. Companies Act, 2013 provides to allot securities within 60 days of receipt of application money or advance for such securities. Section 42 (6) of Act, 2013 provides for interest payable at the rate of twelve percent per annum from the expiry of sixtieth day. Regulation, 2017 aligns the requirement to issue capital instruments with Act, Further, proviso has been inserted to the effect that prior approval of RBI will be required for payment of interest in case of any delay in refund of the amount. Rights issue/ bonus issue/ ESOPs issued While the provisions in relation to rights issue and bonus issue are broadly similar to those under Regulations, 2000 one of the key changes is in relation to subscribing to shares renounced in favor of person resident outside India.

14 Under Regulations, 2000 the investee company could allot the additional rights shares out of unsubscribed portion, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap. As per the explanation inserted in Regulations, 2017, it has been specified that the restriction in relation to repatriation in case where (a) original investment was made on non-repatriation basis or (b) the person was a resident in India when the rights was issued shall be applicable even in case of person resident outside India makes investment on account of shares renounced in its favor by the person to whom it was offered. Similarly, in case of ESOP the provisions are broadly similar to Regulations, 2000 except the proviso inserted. Accordingly, an employee who was a person resident in India when the options were granted cannot repatriate the sale proceeds after selling the shares so acquired pursuant to exercise of options. Sectoral limit prescribed The sectoral limit in Regulations, 2017 is aligned with the limits set out in the Consolidated FDI Policy 2017, except for the following: S.No. Sector/Activity Sectoral cap Entry route Limit prescribed under FDI Policy 13. Private Security Agencies 49% Government Automatic up to 49% ; Government route beyond 49% and up to 74% Market place model of e- 100% Automatic No such sector/ activity commerce specified. F.5 Commodities Spot Exchange 49% Automatic No such sector/ activity specified. Additional matters clarified in MD-FDI Venture Capital Fund (VCF) excluded from Investment Vehicle VCF established in the form of a trust or a company or a body corporate and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996 will not be considered as an Investment Vehicle for the purpose of Regulations, 2017 and MD-FDI. Pledge of Capital Instruments Regulations, 2017 permits a promoter of a company registered in India (borrowing company), which has raised external commercial borrowing

15 (ECB) in compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000 to pledge shares of the borrowing company. o MD-FDI corrects the same and enables a promoter to pledge capital instruments of the borrowing company. Further, it has been specified that capital instruments of an Indian company or units transferred by way of pledge should be unencumbered. Investment in NCDs/ Bonds issued by Indian Company Para 1.A. of Schedule V of Regulations, 2017 permits an FPI to purchase NCDs/ Bonds of an Indian company. o MD-FDI clarifies following in relation to the same: (i) All investments made by an FPI after February 03, 2015, within the limit for investment in corporate bonds, will have to be made in corporate bonds with a minimum residual maturity of three years. In addition, investments made after February 03, 2015 against the limits vacated when the current investment runs off either through sale or redemption, has to be made in corporate bonds with a minimum residual maturity of three years. There will, however, be no lock-in period and FPIs can sell the securities (including those that are presently held with less than three years residual maturity) to domestic investor. (ii) (iii) FPIs can invest in primary issues of Non-Convertible Debentures (NCDs)/ bonds only if listing of such bonds/ NCDs is committed to be done within 15 days of such investment. In case the NCDs/ bonds issued to the FPIs are not listed within 15 days of issuance to the FPIs, for any reason, then the FPIs shall immediately dispose of these bonds/ NCDs either by way of sale to a third party or to the issuer. The terms of offer to FPIs should contain a clause that the issuer of such debt securities shall immediately redeem/ buyback the said securities from the FPIs in such an eventuality. FPIs are permitted to invest in unlisted NCDs/ bonds issued by an Indian company subject to a minimum residual maturity of three years and end-use restriction on investment in real estate business, capital market and purchase of land. The custodian banks shall ensure compliance with this condition 7 Short selling by FPI Regulations, 2017 provided that RBI and SEBI will stipulate conditions. o MD-FDI provides that an FPI may undertake short selling as well as lending and borrowing of securities as permitted by the RBI and SEBI subject to the following conditions: 7 In line with SEBI (Foreign Portfolio Investors) (Second Amendment) Regulations, 2017

16 a. The short selling of equity shares by FPIs is permitted for equity shares of those companies where there is at least 2% headroom available for total foreign investment and/or aggregate FPI limit or is not in the caution list or ban list published by the Reserve Bank or any restrictive list published by any authority designated to do so by the Reserve Bank or SEBI. b. Borrowing of equity shares by FPIs will only be for the purpose of delivery into short sale. c. The margin/ collateral will be maintained by FPIs only in the form of cash. No interest shall be paid to the FPI on such margin/ collateral. d. The designated custodian banks shall separately report all transactions pertaining to short selling of equity shares and lending and borrowing of equity shares by FPIs in their daily reporting with a suitable remark (short sold/ lent/ borrowed equity shares) for the purpose of monitoring by the Reserve Bank. Partly paid shares - As per Regulations, 2017 partly paid shares that have been issued to a person resident outside India shall be fully called-up within twelve months of such issue. o MD-FDI clarifies that the time period of 12 months for receipt of the balance consideration need not be insisted upon where the issue size exceeds rupees five hundred crore and the issuer complies with Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements(ICDR)) Regulations, 2009 regarding monitoring agency. o Further, In case of an unlisted Indian company, the balance consideration amount can be received after 12 months where the issue size exceeds rupees five hundred crore. However, the investee company should appoint a monitoring agency on the same lines as required in case of a listed Indian company under the SEBI (ICDR) Regulations. Such monitoring agency (AD Category -1 bank) should report to the investee company as prescribed by the SEBI regulations, ibid, for the listed companies. Amendment of the tenure of CCDs and CCPs shall be in compliance with Companies ct, Conclusion While Regulations, 2000 was revisited and amended frequently to align with other regulatory amendments, Regulations, 2017 is concise as well as comprehensive and avoids repetitive provisions as observed in Schedule of Regulations, Certain amendments, e.g. filing of returns with late submission fee without requirement of filing compounding application, are very practical.

17 Annexure 1 Amendments to take effect subsequently: Proviso (ii) to sub-regulation 1 of regulation 10 of these Regulations; 10. Transfer of capital instruments of an Indian company by or to a person resident outside India (1) A person resident outside India, not being a non-resident Indian or an overseas citizen of India or an erstwhile overseas corporate body may transfer by way of sale or gift the capital instruments of an Indian company or units held by him to any person resident outside India; Explanation: It shall also include transfer of capital instruments of an Indian company pursuant to liquidation, merger, de-merger and amalgamation of entities/ companies incorporated or registered outside India Provided that (ii) where the person resident outside India is an FPI and the acquisition of capital instruments made under Schedule 2 of these regulations 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, provided the sale is within the prescribed time limit, shall not be reckoned as a contravention under these Regulations. The guidelines issued by Securities and Exchange Board of India in this regard shall be applicable. Proviso (ii) to sub-regulation 2 of regulation 10 of these Regulations 10. Transfer of capital instruments of an Indian company by or to a person resident outside India (2) An NRI or an OCI holding capital instruments of an Indian company or units on repatriation basis may transfer the same by way of sale or gift to any person resident outside India; Provided that (ii) where the acquisition of capital instruments by an NRI or an OCI under the provisions of Schedule 3 of these regulations has resulted in a breach of the applicable aggregate NRI/ OCI limit or sectoral limits, the NRI or the OCI 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, provided the sale is within the prescribed time, shall not be reckoned as a contravention under these Regulations.