1 May, 2016
Amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000
Reserve Bank of India (‘RBI’) has, by way of various notifications, amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘FEMA 20’). A brief summary of the key amendments have been set out below:
i. Pursuant to notification dated November 16, 2015 (‘November Notification’), RBI has amended FEMA 20 to facilitate foreign investments under the automatic route in entities regulated by Securities Exchange Board of India (‘SEBI’) or any other designated authority, including alternative investment funds (‘AIFs’), real estate investment trusts (‘REITs’) and infrastructure investment trusts (‘InvIts’). Some of the key amendments proposed under the November Notification are: (a) the term ‘investment vehicle’ has been defined to mean “an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012”, and the term ‘unit’ has been defined to mean “beneficial interest of an investor in the Investment Vehicle and shall include shares or partnership interests”; (b) a new schedule i.e. Schedule 11 has been introduced which, inter-alia, specifies the terms and conditions for foreign investments in an investment vehicle; (c) a person resident outside India (other than an individual who is citizen/entity that is registered/incorporated in Pakistan or Bangladesh), including a registered foreign portfolio investor or a non-resident Indian (‘NRI’) is permitted to acquire, purchase, hold, sell or transfer units of an investment vehicle subject to prescribed conditions; and (d) downstream investment by an investment vehicle will be regarded as foreign investment if neither the sponsor nor the investment manager is Indian ‘owned and controlled’ as defined under FEMA 20.
Thereafter, by way of a notification dated February 15, 2016, RBI has provided clarity on the permissible investments by NRIs. Prior to the amendment, a NRI was defined to mean a person resident outside India, who was either an Indian citizen or a person of Indian origin. Pursuant to the amendment, a NRI has been defined to mean “a person resident outside India who is either a citizen of India or an ‘Overseas Citizen of India’ cardholder (as provided for by the Citizenship Act, 1955)”. Additionally, prior to the amendment, (a) Regulation 5(3)(i) of FEMA 20 permitted NRIs to purchase shares and convertible debentures of an Indian company on a stock exchange under the Portfolio Investment Scheme, in accordance with Schedule 3 thereto; and (b) Regulation 5(3)(ii) of FEMA 20 permitted NRIs to purchase shares and convertible debentures of an Indian company on a non-repatriation basis other than under the Portfolio Investment Scheme, in accordance with Schedule 4 thereto. Pursuant to the amendment, the scope under Regulation 5(3)(i) (read with Schedule 3) and Regulation 5(3)(ii) (read with Schedule 4) has been widened to permit NRIs to acquire securities or units (as opposed to shares and convertible debentures).
By way of notification dated March 30, 2016, RBI permitted foreign direct investment (‘FDI’) up to 49% in the insurance sector under the automatic route with effect from the date of the notification. The Indian Insurance Companies (Foreign Investment) Rules, 2015 have also been amended in this regard. Foreign investment in the insurance sector will be subject to approval/verification by the Insurance Regulatory and Development Authority of India (‘IRDA’). Prior to this amendment, FDI up to 26% was permitted in the insurance sector under the automatic route, while FDI from 26% onwards up to 49% was permitted under the approval route.
Further, RBI has pursuant to a circular dated April 21, 2016 reiterated that foreign investment in units of ‘Investment Vehicles’ registered and regulated by SEBI or any other competent authority is permitted and also set out the salient features of this new investment regime.
Revision of Sectoral Limits – Pension Sector
The Department of Industrial Policy and Promotion (‘DIPP’) has, by way of Press Note 2 of 2016 dated March 23, 2016 (‘Press Note 2’), revised the sectoral limit applicable to the pension sector. Earlier, foreign investment up to 26% was permitted under the automatic route, and beyond 26% and up to 49% was considered under the approval route. Pursuant to Press Note 2, foreign investment up to 49% is permitted under the automatic route in the pension sector.
Guidelines for FDI in E-Commerce
DIPP has, by way of its Press Note 3 of 2016 dated March 29, 2016 (‘Press Note 3’), prescribed guidelines for FDI in E-Commerce. Press Note 3 defines ‘E-Commerce’ to mean ‘buying and selling of goods and services including digital products over digital & electronic network’. In terms of Press Note 3, no FDI is permitted in an Inventory Based Model of E-Commerce1. 100% FDI under the automatic route is permitted in the Marketplace Model of E-Commerce2 subject to, inter-alia, the following conditions:
- such entity following the Marketplace Model will be permitted to enter into transactions with sellers registered on its platform on B2B basis;
- it will not permit more than 25% of the sales implemented through its marketplace to emanate from one vendor or their group companies;
- it will not, directly or indirectly, influence the sale price of goods or services, and will maintain a level playing field;
- guidelines on cash and carry wholesale trading as given in the FDI Policy will apply to B2B e-commerce;
- such entity may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services; and
- it will not exercise ownership over the inventory i.e., goods purported to be sold since such ownership over the inventory will render the business into Inventory Based Model.
Further, sale of services through e-commerce will be under the automatic route, and subject to prescribed conditions.
Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015
RBI has, by way of a notification dated January 21, 2016, issued the Foreign Exchange Management (Acquisition and Transfer of Immoveable Property outside India) Regulations, 2015 (‘2015 Regulations’) that replaces the erstwhile Foreign Exchange Management (Acquisition and Transfer of Immoveable Property Outside India), Regulations, 2000 (‘2000 Regulations’). While the 2015 Regulations are substantially similar to the 2000 Regulations, a new provision has been inserted, whereby a person resident in India may acquire immoveable property outside India jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India. The term ‘relative’ in relation to an individual has been defined to mean husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
RBI announces Regulatory Relaxations for Startups
By way of a Press Release dated February 2, 2016, RBI has proposed regulatory changes for easing cross-border transactions, particularly relating to the operations of the start-up enterprises. Further, by way of a circular dated February 11, 2016, RBI has, inter-alia, clarified that:
- a start-up in India, having an overseas subsidiary, is permitted to open foreign currency account abroad to pool the foreign exchange earnings out of the exports/ sales made by the concerned start-up and the balance in the foreign currency account due to the Indian start-up should be repatriated to India within nine months from realization of exports;
- the overseas subsidiary of the start-up is permitted to pool its receivables arising from the transactions with residents in India as well as the transactions with non-residents abroad into such foreign currency account opened abroad in the name of the start-up;
- a start-up is permitted to avail the facility for realising the receivables of its overseas subsidiary or making the repatriation through online payment gateway service providers for a value not exceeding US$ 10,000 or up to such limit as prescribed; and
- to facilitate the above arrangement, an appropriate contractual arrangement between the start-up, its overseas subsidiary and the customers concerned should be in place.
Further, the DIPP has issued a notification dated February 17, 2016 wherein it has clarified that an entity (i.e., a private limited company, a Limited Liability Partnership (‘LLP’) or registered partnership firm) will be permitted to be registered and recognized as a start-up for up to five years from the date of its incorporation/registration, if: (i) its turnover for any of the financial years has not exceeded ¤25 crores (approximately US$3,800,000); and (ii) it is working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. Further, any such entity formed by splitting up or reconstruction of a business already in existence will not be considered a ‘start-up’.
Mandatory filing of Form ARF, FCGPR and FCTRS on e-Biz platform
RBI has enabled online filing of Advance Remittance Form, Form FC-GPR and Form FCTRS. The physical filing of such forms has been discontinued with effect from February 8, 2016.
1 An e-commerce entity, that owns the inventory of goods and services, which are directly sold to the consumers.
2 An e-commerce entity providing an information technology platform on a digital & electronic network, to act as a facilitator between buyer and seller.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
