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New regulations for issue and transfer of FDI instruments In India

Published: 16 Jan 2018

India is fast emerging as most preferred destination for exploring new business opportunities to foreign investors. Indian government and authorities too are working towards making it easier for foreign investors to make investments in Indian entities. 

On November 07, 2017, Reserve Bank of India (RBI) has issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (TIS Regulations) with a view to encourage and foreign investment. These regulations are in supersession of extant regulations of 2000.

Permitted transactions: The following are the list of transactions permitted under the TIS Regulations, provided the transactions are in accordance with the prescribed procedures:

·  Any investment made by a Person Resident Outside India are subject to the entry routes, sectoral caps or the investment limits. A citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan cannot purchase capital instruments without the prior approval of Indian Government.

·  A Person Resident outside India may also make investment in capital instruments (excluding share warrants) issued by such company as a rights issue or a bonus issue.

·  An Indian company may issue “employees’ stock option” and/ or “sweat equity shares” to employees/directors of such company or its holding company or joint venture or wholly owned overseas subsidiary/ subsidiaries who are resident outside India.

·  A Person Resident outside India may purchase convertible notes issued by an Indian startup company for an amount of twenty five lakh rupees (Rs. 2.5 million) or more in a single tranche. Citizens/companies of Pakistan/Bangladesh are prohibited from purchasing convertible notes issued by Indian Startup.

·  A Transferee or new Company emerged out of merger/amalgamation/demerger scheme approved by National Company Law Tribunal may issue capital instruments to the existing shareholders of the transferor company residing outside India.

Pricing:

TIS Regulations provide specific guidance for pricing of capital instruments of an Indian company:

·  Issue by such company to a Person Resident outside India

·  Transferred from a person resident in India to a Person Resident outside India

·  Transferred by Person Resident Outside India to a person resident in India

·   Swap of capital instruments

Reporting requirements: The forms for reporting requirement for any Investment in India by a Person Resident Outside India are as under:

·  Advance Remittance Form (ARF)

·  Form Foreign Currency Gross Provisional Return (FC-GPR)

·  Annual Return on Foreign Liabilities and Assets (FLA)

·  Form Foreign Currency – Transfer of Shares (FC – TRS)

·  Form Employees Stock Option (ESOP)

·  Form Depository Receipt Return (DRR)

·  Form LLP

·  LEC

·  LEC (NRI)

·  Downstream Investment

·  Form Convertible Notes (CN)

Prohibited Activities for Investment by a Persons Resident outside India: Investment by a Person Resident outside India is expressly prohibited in the following activities:

·  Lottery Business including Government/ private lottery, online lotteries

·  Gambling and betting including casinos

·  Chit funds. (Exception: In consultation with State Government, the Registrar of Chits may permit any chit fund to accept subscription from Non-resident Indians and Overseas Citizens of India)

·  Nidhi company

·  Trading in Transferable Development Rights (TDRs)

·  Real Estate Business or Construction of Farm Houses.

·  Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

·  Activities/ sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations.

·  Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Conclusion:  In this global era, foreign investment is one of the key factors that will contribute to the economic growth of a nation. Indian Government and RBI are framing dynamic and friendly laws, rules and regulations easing the procedures for encouraging PRI to make investments in India. The new regulations have been framed with the objective of attracting more FDI in Indian entities. It is hoped that more FDI will follow seamlessly into Indian Companies and FDI will play vital role in enhancing India’s standing as a key economic player in the global arena.  

Need more information? Contact me on bhumesh.verma@corpcommlegal.com.

Bhumesh Verma

Firm: Corp Comm Legal
Country: India

Practice Area: Contract

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