3 August, 2016
Amendments to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2016
Reserve Bank of India (‘RBI’) has, by way of notifications dated April 28, 2016 and May 20, 2016, made the following amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000:
i. The term ‘startup’ has been defined to mean a private limited company / limited liability partnership, incorporated within the preceding five years, with an annu- al turnover not exceeding ¤25 crores (approximately US$3.7 million) in any preceding financial year, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property, provided that such entity is not formed by splitting up or reconstruction of an existing business;
ii. Schedule 6 has been amended to permit foreign venture capital investors (‘FVCI’) registered with Securities and Exchange Board of India (‘SEBI’) to invest in: (a) equity, equity-linked instruments or debt instruments issued by startups, irre- spective of the sector of such startup; (b) units of a registered Category I Alter- native Investment Fund (‘Cat-I AIF’) or units of a scheme or a fund set up by a Cat-I AIF; (c) equity, equity-linked instruments or debt instruments issued by an unlisted Indian company engaged in specified sectors;
iii. A new Regulation 10A has been inserted which provides for the following:
In case of transfer of shares between a resident and a non-resident, not exceed- ing 25% of the total consideration can be paid by the buyer on a deferred basis, for which an escrow arrangement may be made, for a period not exceeding 18 months from the date of the transfer agreement; and
Even if the total consideration has been paid, the seller may furnish an indemnity for an amount not exceeding 25% of the total consideration, for a period not exceeding 18 months from the date of payment of the full consideration.
iv. The total consideration finally paid for such shares must comply with applicable pricing guidelines.
Revisions to FDI Policy
The Department of Industrial Policy and Promotion (‘DIPP’) has, by way of Press Note No. 5 dated June 24, 2016 (‘Press Note 5’),introduced the following notable amendments to the FDI Policy:
100% foreign direct investment (‘FDI’) is permitted under the approval route for trading, including through e-commerce, in respect of food products manufac- tured or produced in India;
In the defence sector, FDI beyond 49% is permitted through the approval route, where the investment results in Indian access to modern technology or for other reasons. The erstwhile condition for such FDI, requiring such investment to result in access to ‘state-of-art’ technology, has been dispensed with;
Foreign investment in the civil aviation sector has been liberalised, whereby: (a) 100% FDI is permitted under the automatic route in brownfield and greenfield airport projects; and (b) FDI has been raised to 100% (with up to 49% under the automatic route and 100% through the automatic route for non-resident Indians (‘NRIs’)) for scheduled air transport services, domestic scheduled passenger air- lines and regional air transport services. Foreign airlines continue to be allowed to invest in the capital of Indian companies operating scheduled and non-scheduled air-transport services up to 49%;
FDI in brownfield pharmaceutical projects has been permitted up to 100%, with 74% under the automatic route. However, a non-compete clause is not permitted in transactions, except in certain special circumstances with the prior approval of the Foreign Investment Promotion Board;
Local sourcing norms have been relaxed for three years for entities engaged in sin- gle brand retail trading of products having ‘state-of-art’ and ‘cutting edge’ tech- nology, and where local sourcing is not possible;
FDI in private security agencies has been raised to 74%, with 49% permitted under automatic route. It is clarified that the terms ‘private security agencies’, ‘private se- curity’, and ‘armoured car service’ will have the same meaning as ascribed to such terms under the Private Security Agencies (Regulation) Act, 2005. Accordingly, private security agencies would include any person (other than any governmental agency) providing private security services including training of private security guards and deployment of armoured cars;
FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture was permitted up to 100% under the automatic route under con- trolled conditions. The requirement of ‘controlled conditions’ for FDI in these ac- tivities has now been removed; and
100% FDI in broadcasting carriage services, including teleports, direct to home, cable networks, mobile TV and headend-in-the-sky broadcasting services, has been permitted under the automatic route.
RBI Circular on Investment in Credit Information Companies
Pursuant to the circular dated May 19, 2016 issued by RBI, all credit information companies (‘CIC’) have been directed to comply with the following:
Investments by any person (whether resident or otherwise), directly or indirectly, in a CIC, must not exceed 10% of the equity capital of the investee company. How- ever, RBI may consider allowing higher FDI limits to entities with an established track record in running a credit information bureau in the following cases:
up to 49%, if ownership is not well diversified (i.e., one or more shareholders each hold more than 10% of voting rights in the company);
up to 100%, if ownership is well diversified, or if their ownership is not well di- versified, but at least 50% of the directors of the investee CIC are Indian nation- als/ NRIs/ persons of Indian origin (out of which at least one third of the direc- tors must be Indian nationals resident in India); and
The investor company should preferably be listed on a recognised stock exchange.
A foreign institutional investor (‘FII’)/ foreign portfolio investor (‘FPI’) is permitted to invest in a CIC subject to certain prescribed conditions.
If the investor in a CIC is a wholly owned subsidiary (directly or indirectly) of an investment holding company, then the above conditions will be applicable to the operating group company that is engaged in the credit information business and has undertaken to provide technical know-how to the CIC in India.
Disclosure of Compounding Orders Passed by RBI on RBI’s Website
With a view to ensure transparency and disclosure, compounding orders passed by RBI on or after June 1, 2016 will be publicly available on RBI’s website (www.rbi.org.in). The RBI circular dated May 26, 2016 in relation thereto also sets out a guidance note for calculating (on an in- dicative basis) the amount of penalty/ fine that may be imposed on the applicant, although the actual amount may vary on a case to case basis.
Foreign Exchange Management (Establishment in India of a Branch or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016
RBI has, by way of a recent notification issued the Foreign Exchange Management (Estab- lishment in India of a Branch or a Liaison Office or a Project Office or any Other Place of Busi- ness) Regulations, 2016 (‘New Regulations’) which replace the erstwhile regulations of 2000. The key changes in the New Regulations, inter alia, include: (i) the term ‘branch office’ has been defined to mean any establishment described as such by the concerned company; (ii) cancella- tion of approval if no office is opened within six months of receiving the approval letter, subject to an extension of six months by the Authorised Dealer Category-I bank (‘AD Bank’) on account of reasons beyond control; (iii) citizens of certain specified countries are required to obtain registration with the relevant State police authorities in addition to the RBI approval for estab- lishing a branch office or liaison office or project office or any other place of business; and (iv) AD Bank may permit intermittent remittances by branch office/ project offices pending wind- ing up/ completion of the project subject to submission of specified documents.
Foreign Exchange Management (Deposit) Regulations, 2016
RBI has, by way of notification dated April 1, 2016, issued the Foreign Exchange Manage- ment (Deposit) Regulations, 2016, which supersede the erstwhile regulations of 2000, with the following key changes:
A person resident outside India having a business interest in India is permitted to open a Special Non Resident Rupee Account (‘SNRR Account’) with an AD Bank for bona fide transactions in Rupees subject to certain conditions;
A shipping or airline company incorporated outside India is permitted to hold and maintain a foreign currency account with an AD Bank for meeting expenses in India. However, freight or passage fare collections in India or inward remittances through banking channels from its office outside India are the only permissible credits; and
An AD Bank is permitted to allow unincorporated joint ventures between foreign and Indian entities executing a contract in India, to open and maintain a non-interest bearing foreign currency account and a SNRR Account for the purpose of undertak- ing transactions in the ordinary course of its business, subject to certain conditions.
Foreign Investment in Units Issued by REITs, InvITs and AIFs
Salient features of foreign investment permitted by RBI, pursuant to its circular dated April 21, 2016, in the units of investment vehicles for real estate and infrastructure registered with the SEBI or any other competent authority are as under:
A person resident outside India (including a Registered Foreign Portfolio Investor (‘RFPI’) and NRIs may invest in units of real estate investment trusts (‘REITs’);
A person resident outside India who has acquired or purchased units in accord- ance with the regulations may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI;
An Alternative Investment Fund Category III with foreign investment can make portfolio investment in only those securities or instruments in which a RFPI is al- lowed to invest; and
Foreign investment in units of REITs registered with SEBI will not be included in ‘real estate business’.
Revision of Sectoral Limits – ARCs
DIPP has, by way of Press Note 4 dated May 6, 2016 (‘Press Note 4’), permitted 100% FDI in asset reconstruction companies (‘ARCs’) under the automatic route, from the erstwhile 49%, subject to the following key conditions:
Earlier, an ARC sponsor was not allowed to hold more than 50% shareholding, including by way of FDI or by routing it through a FII/ FPI controlled by the same sponsor, in line with the existing restriction under the Securitisation and Re- construction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’). This restriction is proposed to be done away with by the Enforce- ment of Security Interest and Recovery of Debts Laws and Miscellaneous Provi- sions (Amendment) Bill, 2016. Therefore, Press Note 4 provides that the invest- ment limit of a sponsor in an ARC’s shareholding will be governed by SARFAESI;
Permissible FII/ FPI investment in each tranche of security receipts has been in- creased to 100%, as opposed to the earlier 74%, subject to compliance with RBI’s directions; and
Foreign investment in an ARC is now subject to all provisions of SARFAESI (instead of only Section 3(3)(f)).
RBI Circular on Approval Route Cases for Raising External Commercial Borrowings
As a measure to expedite the process for obtaining RBI approval for raising external com- mercial borrowings (‘ECBs’) through the approval route, RBI has, pursuant to a circular dated June 30, 2016 (‘ECB Circular’), directed that ECBs above certain thresholds (yet to be prescribed) will be required to be placed before an ‘Empowered Committee’ of RBI. RBI will take a final decision on these cases after taking into account the recommendation of the Empowered Com- mittee. Prior to the ECB Circular, all approval route cases were required to be placed before the Empowered Committee for consideration.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
