RBI/FED/2017-18/60
FED Master Direction No. 11/2017-18
January
4, 2018
To,
All Authorised Dealer Category –
I banks and Authorised banks
Madam / Sir,
Master
Direction – Foreign Investment in India
Foreign Investment in India is
regulated in terms of clause (b) sub-section 3 of section 6 and section 47
of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign
Exchange Management (Transfer or Issue of a Security by a Person resident
Outside India) Regulations, 2017 issued vide Notification No. FEMA
20(R)/2017-RB dated November 7, 2017. These Regulations are amended from
time to time to incorporate the changes in the regulatory framework and
published through amendment notifications.
2. Within the contours of the
Regulations, Reserve Bank of India also issues directions to Authorised
Persons under Section 11 of the Foreign Exchange Management Act (FEMA),
1999. This Master Direction lays down the modalities as to how the foreign
exchange business has to be conducted by the Authorised Persons with their
customers/ constituents with a view to implementing the regulations framed.
3. Instructions issued on Foreign
Investment in India and its related aspects under the FEMA have been
compiled in this Master Direction. The list of underlying circulars/
notifications which form the basis of this Master Direction is furnished in
the Appendix.
4. Reporting instructions can be
found in Master Direction on Reporting (Master Direction No. 18 dated
January 1, 2016). The person/ entity responsible for filing such reports
shall be liable for payment of late submission fee for any delays in
reporting.
5. It may be noted that,
whenever necessary, Reserve Bank shall issue directions to Authorised
Persons through A.P. (DIR Series) Circulars in regard to any change in the
Regulations or the manner in which relative transactions are to be
conducted by the Authorised Persons with their customers/ constituents and/
or amend the Master Direction issued herewith. This Master
Direction has been issued under sections 10(4) and 11(1) of the Foreign
Exchange Management Act, 1999 (42 of 1999) and are without prejudice to
permissions/ approvals, if any, required under any other law
Yours
faithfully
(Shekhar
Bhatnagar)
Chief General Manager in charge
Master
Direction – Foreign Investment in India
1. Introduction
1.1 The Foreign Exchange
Management Act, 1999 (FEMA) empowers the Reserve Bank to frame regulations
to prohibit, restrict or regulate transfer or issue of any security by a
person resident outside India. These regulations are notified as Foreign
Exchange Management (Transfer or Issue of Security by a Person resident
Outside India) Regulations, 2017 under Notification No. FEMA
20(R)/2017-RB of November 7, 2017, [FEMA 20(R)].
1.2 An investment made by a
person resident outside India in accordance with FEMA or the rules or the
regulations framed thereunder and held on the date of commencement of FEMA
20(R), shall be deemed to have been made in accordance with FEMA 20(R) and
shall accordingly be governed by FEMA 20(R).
1.3 A person resident outside
India may hold, own, transfer or invest in a security in India if such
security was acquired, held or owned by such person when he was resident in
India or inherited from a person who was resident in India. Such investment
will be held by such person on a non-repatriable basis.
2. Key terms
Some key terms used in this
Master Direction are given below:
2.1 ‘Act’ is the Foreign
Exchange Management Act, 1999 (42 of 1999).
2.2 ‘Capital Instruments’ are
equity shares, debentures, preference shares and share warrants issued by
an Indian company. The details of what shall construe capital instruments
are at para 4 of this Master Direction.
2.3 ‘Convertible Note’ is an
instrument issued by a startup company evidencing receipt of money
initially as debt, which is repayable at the option of the holder, or which
is convertible into such number of equity shares of such startup company,
within a period not exceeding five years from the date of issue of the
convertible note, upon occurrence of specified events as per the other
terms and conditions agreed to and indicated in the instrument.
2.4 ‘E-commerce’ is buying and
selling of goods and services including digital products over digital &
electronic network.
2.4.1 ‘E-commerce entity’ are
the following entities conducting the e-commerce business
1.
a
company incorporated under the Companies Act, 2013 or
2.
a
foreign company covered under section 2 (42) of the Companies Act, 2013 or
3.
an
office, branch or agency in India owned or controlled by a person resident
outside India and
2.4.2 ‘Inventory based model of
e-commerce’ means an e-commerce activity where inventory of goods and
services is owned by e-commerce entity and is sold to the consumers
directly.
2.4.3 ‘Market place model of
e-commerce’ means providing of an information technology platform by an
e-commerce entity on a digital & electronic network to act as a
facilitator between buyer and seller.
2.4.4 Foreign investment is not
permitted in Inventory based model of e-commerce.
2.5 ‘FDI linked performance
conditions’ is the sector specific conditions stipulated in regulation 16
of FEMA 20(R) for companies receiving foreign investment.
2.6 ‘Foreign Direct Investment’
(FDI) is the investment through capital instruments by a person resident
outside India (a) in an unlisted Indian company; or (b) in 10 percent or
more of the post issue paid-up equity capital on a fully diluted basis of a
listed Indian company.
2.6.1 If 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 will continue to be
treated as FDI.
2.6.2 Fully diluted basis means
the total number of shares that would be outstanding if all possible
sources of conversion are exercised.
2.7 ‘Foreign Portfolio
Investment’ is any investment made by a person resident outside India in
capital instruments where such investment is (a) less than 10 percent of
the post issue paid-up equity capital on a fully diluted basis of a listed
Indian company or (b) less than 10 percent of the paid up value of each
series of capital instruments of a listed Indian company.
2.8 ‘Foreign Portfolio Investor
(FPI)’ is a person registered in accordance with the provisions of
Securities Exchange Board of India (Foreign Portfolio Investors)
Regulations, 2014.
2.8.1 Any Foreign Institutional
Investor (FII) or a sub account registered under the Securities Exchange
Board of India (Foreign Institutional Investors) Regulations, 1995 and
holding a valid certificate of registration from Securities and Exchange
Board of India shall be deemed to be a FPI till the expiry of the block of
three years from the enactment of the Securities Exchange Board of India
(FPI) Regulations, 2014.
2.9 ‘Foreign Investment’ is 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.
2.9.1 Issue/ transfer of
‘participating interest/ right’ in oil fields by Indian companies to a
person resident outside India would be treated as foreign investment.
2.9.2 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.
2.9.3 A person resident outside
India may hold foreign investment either as Foreign Direct Investment or as
Foreign Portfolio Investment in any particular Indian company.
2.10 ‘Group company’ is two or
more enterprises which, directly or indirectly, are in a position to (a)
exercise 26 percent, or more of voting rights in other enterprise; or (b)
appoint more than 50 percent of members of board of directors in the other
enterprise.
2.11 ‘Indian entity’ is an
Indian company or an LLP.
2.12 ‘Investment’ is to
subscribe, acquire, hold or transfer any security or unit issued by a
person resident in India.
2.12.1 Investment will include
acquisition, holding or transfer of depository receipts issued outside
India, the underlying of which is a security issued by a person resident in
India.
2.12.2 For the purpose of an
LLP, investment shall mean capital contribution or acquisition/ transfer of
profit shares.
2.13 'Investment on repatriation
basis' is an investment, the sale/ maturity proceeds of which are, net of
taxes, eligible to be repatriated and the expression 'Investment on nonrepatriation
basis', will be construed accordingly.
2.14 ‘Investment Vehicle’ is an
entity registered and regulated under relevant regulations framed by SEBI
or any other authority designated for the purpose and will be 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.
2.14.1 A Venture Capital Fund
(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 FEMA 20 (R) and this Master Direction.
2.15 ‘Limited Liability
Partnership (LLP)’ is a partnership formed and registered under the Limited
Liability Partnership Act, 2008
2.16 ‘Listed Indian Company’ is
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
2.17 ‘Non-Resident Indian (NRI)’
is an individual resident outside India who is citizen of India.
2.18 ‘Overseas Citizen of India
(OCI)’ is an individual resident outside India who is registered as an
Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship
Act, 1955.
2.19 ‘Resident Indian citizen’
is 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 (57 of
1955.
2.20 ‘Real estate business’ is
dealing in land and immovable property with a view to earning profit
therefrom and does not include development of townships, construction of
residential/ commercial premises, roads or bridges, educational
institutions, recreational facilities, city and regional level
infrastructure, townships. Earning of rent income on lease of the property,
not amounting to transfer, will not amount to real estate business.
2.21 ‘Sectoral cap’ is the
maximum investment including both foreign investment on a repatriation
basis by persons resident outside India in capital instruments of a company
or the capital of an LLP, as the case may be, and indirect foreign
investment, unless provided otherwise. This shall be the composite limit
for the investee Indian entity.
2.21.1 FCCBs and DRs having
underlying of instruments being in the nature of debt shall not be included
in the sectoral cap.
2.21.2 Any equity held by a
person resident outside India resulting from conversion of any debt
instrument under any arrangement shall be reckoned under the sectoral cap.
2.22 ‘Unit’ is the beneficial
interest of an investor in an investment vehicle.
3. Prohibited sectors/ persons
3.1 Investment by a person
resident outside India is prohibited in the following sectors:
1.
Lottery
Business including Government/ private lottery, online lotteries.
2.
Gambling
and betting including casinos.
3.
Chit
funds (except for investment made by NRIs and OCIs on a non-repatriation
basis).
4.
Nidhi
company.
5.
Trading
in Transferable Development Rights (TDRs).
6.
Real
Estate Business or Construction of Farm Houses.
7.
Manufacturing
of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes. The prohibition is on manufacturing of the products mentioned
and foreign investment in other activities relating to these products
including wholesale cash and carry, retail trading etc. will be governed by
the sectoral restrictions laid down in Regulation 16 of FEMA 20(R).
8.
Activities/
sectors not open to private sector investment viz., (i) Atomic energy and
(ii) Railway operations
9.
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
3.2 Any investment by a person
who is a citizen of Bangladesh or Pakistan or is an entity incorporated in
Bangladesh or Pakistan requires prior Government approval.
3.3 A person who is a citizen of
Pakistan or an entity incorporated in Pakistan can, only with the prior
Government approval, invest in sectors/ activities other than defence,
space, atomic energy and sectors/ activities prohibited for foreign
investment.
4. Capital Instruments
4.1 An Indian company is
permitted to receive foreign investment by issuing capital instruments to
the investor. The capital instruments are equity shares, debentures,
preference shares and share warrants issued by the Indian company.
4.2 Equity shares: Equity
shares are those issued in accordance with the provisions of the Companies
Act, 2013 and will include equity shares that have been partly paid.
4.3 Partly paid shares: Partly
paid shares issued on or after July 8, 2014 will be considered as capital
instruments.
4.3.1 Partly paid shares that
have been issued to a person resident outside India should be fully
called-up within twelve months of such issue.
4.3.2 Twenty five percent of the
total consideration amount (including share premium, if any), has to be
received upfront and the balance consideration towards fully-paid equity
shares should be received within a period of twelve months from the date of
issue of partly-paid shares.
4.3.3 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.
4.3.4 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.
4.3.5 In case of non-payment of
call money, the forfeiture of the amount paid upfront will be in accordance
with the provisions of the Companies Act, 2013 and the Income Tax
provisions, as applicable.
4.4 Share warrants: Share
warrants issued on or after July 8, 2014 will be considered as capital
instruments.
4.4.1 Share Warrants are those
issued by an Indian Company in accordance with the Regulations issued by
the Securities and Exchange Board of India in this regard.
4.4.2 At least twenty five
percent of the consideration has to be received upfront and the balance
amount within eighteen months of issuance of share warrants.
4.4.3 In case of non-payment of
balance consideration, the forfeiture of the amount paid upfront will be in
accordance with the provisions of the Companies Act, 2013 and the Income
Tax provisions, as applicable
4.5 The deferment of payment of
consideration amount by the foreign investors or shortfall in receipt of
consideration amount as per applicable pricing guidelines will not be
treated as subscription to partly paid shares and warrants.
4.6 Debentures: Debentures
are fully, compulsorily and mandatorily convertible debentures.
4.6.1 Amendment of the tenure of
compulsorily and mandatorily convertible debentures shall be in compliance
with the Companies Act, 2013.
4.6.2 Optionally convertible/
partially convertible debentures issued up to June 7, 2007 or for which
funds were received for such issue prior to June 7, 2007 are deemed to have
been issued in accordance with FEMA 20(R) till their original maturity. Any
extension of maturity prior to June 7, 2007 will be considered as original
maturity.
4.7 Preference shares: Preference
shares are fully, compulsorily and mandatorily convertible preference
shares.
4.7.1 Amendment of the tenure of
fully, compulsorily and mandatorily convertible preference shares shall be
in compliance with the Companies Act, 2013
4.7.2 Non-convertible/ optionally
convertible/ partially convertible preference shares issued up to April 30,
2007 are deemed to have been issued in accordance with FEMA 20(R) till
their original maturity. They, however, will continue to be outside the
sectoral caps till their original maturity. Any extension of maturity prior
to April 30, 2007 will be considered as original maturity.
4.7.3 Non-convertible/
optionally convertible/ partially convertible preference shares funds for
which have been received on or after May 1, 2007 shall be treated as debt
and shall conform to External Commercial Borrowing (ECB) guidelines framed
under Foreign Exchange Management (Borrowing and Lending in Foreign
Exchange) Regulations, 2000. Accordingly, all the norms applicable for
ECBs, viz. eligible borrowers, recognised lenders, amount and maturity, end
use stipulations, etc. would apply. Since these instruments would be
denominated in rupees, the rupee interest rate will be based on the swap
equivalent of LIBOR plus the spread as permissible for ECBs of
corresponding maturity.
4.8 Capital instruments issued
on or after December 30, 2013 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.
5. Entry routes and Permitted
sectors
5.1 Entry Routes
5.1.1 Automatic Route is the
entry route through which investment by a person resident outside India
does not require the prior Reserve Bank approval or Government approval.
5.1.2 Government Route is the
entry route through which investment by a person resident outside India
requires prior Government approval. Foreign investment received under this
route shall be in accordance with the conditions stipulated by the Government
in its approval.
5.1.3 'Government approval' is
approval from the erstwhile Secretariat for Industrial Assistance (SIA),
Department of Industrial Policy and Promotion, Government of India and/ or
the erstwhile Foreign Investment Promotion Board (FIPB) and/ or any of the
ministry/ department of the Government of India, as the case may be.
5.1.4 Aggregate Foreign
Portfolio Investment up to 49 percent of the paid-up equity 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 Regulation 16 of FEMA 20(R).
5.2 Sectoral caps
5.2.1 Foreign investment in the
sectors/ activities given in Regulation 16 of FEMA 20(R) is permitted up to
the limit indicated against each sector/ activity, subject to applicable
laws/ regulations, security and other conditionalities.
5.2.2 Sectoral cap for the
sectors/ activities is the limit indicated against each sector. The total
foreign investment shall not exceed the sectoral/ statutory cap
5.2.3 Foreign investment is
permitted up to 100% on the automatic route, subject to applicable laws/
regulations, security and other conditionalities, in sectors/ activities
not listed in Regulation 16 of FEMA 20(R) and not prohibited under
Regulation 15 of FEMA 20(R). This condition is not applicable for
activities in financial services.
5.2.4 Foreign investment in
financial services other than those indicated under serial number “F” in
Regulation 16 of FEMA 20(R) would require prior Government approval.
5.2.5 Wherever there is a
requirement of minimum capitalization, it will include premium received
along with the face value of the capital instrument, only when it is
received by the company upon issue of such instruments to a person resident
outside India. Amount paid by the transferee during post-issue transfer
beyond the issue price of the capital instrument, cannot be taken into
account while calculating minimum capitalization requirement.
5.2.6 Foreign investment into an
Indian company, engaged only in the activity of investing in the capital of
other Indian company/ies, will require prior Government approval. A core
investment company (CIC) will have to additionally follow the Reserve Bank’s
regulatory framework for CICs.
5.2.7 For undertaking activities
which are under automatic route and without FDI linked performance
conditions, an Indian company which does not have any operations and also
has not made any downstream investment, may receive investment in its
capital instruments from persons resident outside India under automatic
route. However, Government approval will be required for such companies for
undertaking activities which are under Government route. As and when such a
company commences business(s) or makes downstream investment, it will have
to comply with the relevant sectoral conditions on entry route,
conditionalities and caps.
5.2.8 The onus of compliance
with the sectoral/ statutory caps on foreign investment and attendant conditions
if any, will be on the company receiving foreign investment.
6. Permitted Investments by
persons resident outside India
Unless otherwise specifically
stated, any investment made by a person resident outside India shall be
subject to the entry routes, sectoral caps or the investment limits, as the
case may be, and the attendant conditionalities for making such investment.
A person resident outside India may make investment as stated hereinafter.
6.1 Subscribe/ purchase/ sale of
capital instruments of an Indian company is permitted as per the directions
laid down in Annex 1.
6.2 Purchase/ sale of capital
instruments of a listed Indian company on a recognised stock exchange in
India by Foreign Portfolio Investors is permitted as per the directions
laid down in Annex 2.
6.3 Purchase/ sale of Capital
Instruments of a listed Indian company on a recognised stock exchange in
India by Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) on
repatriation basis is permitted as per the directions laid down in Annex
3.
6.4 Purchase/ sale of Capital
Instruments of an Indian company or Units or contribution to capital of a
LLP or a firm or a proprietary concern by Non-Resident Indian (NRI) or
Overseas Citizen of India (OCI) on a Non-Repatriation basis is permitted as
per the directions laid down in Annex 4.
6.5 Purchase/ sale of securities
other than capital instruments by a person resident outside India is
permitted as per the directions laid down in Annex 5.
6.6 Investment in a Limited
Liability Partnership (LLP) is permitted as per the directions laid down
in Annex 6.
6.7 Investment by a Foreign
Venture Capital Investor (FVCI) is permitted as per the directions laid
down in Annex 7.
6.8 Investment in an Investment
Vehicle is permitted as per the directions laid down in Annex 8.
6.9 Issue/ transfer of eligible
instruments to a foreign depository for the purpose of issuance of
depository receipts by eligible person(s) is permitted as per the
directions laid down in Annex 9.
6.10 Purchase/ sale of Indian
Depository Receipts (IDRs) issued by Companies Resident outside India is
permitted as per directions laid down in Annex 10.
6.11 Acquisition through rights
issue or bonus issue
6.11.1 A person resident outside
India having investment in an Indian company is permitted to invest in the
capital instruments (other than share warrants) issued by such company as a
rights issue or a bonus issue subject to the following conditions:
1.
The
offer made by the Indian company is in compliance with the provisions of
the Companies Act, 2013;
2.
The
issue does not result in a breach of the sectoral cap applicable to the
company;
3.
The
shareholding on the basis of which the rights issue or the bonus issue has
been made must have been acquired and held as per the provisions of FEMA
20(R);
4.
The
capital instruments (other than share warrants) acquired by the person
resident outside India as bonus or rights issue will be subject to the same
conditions including restrictions in regard to repatriability as applicable
to the original holding against which rights or bonus issue has been made;
5.
In
case of a listed Indian company, the rights issued to persons resident
outside India shall be at a price determined by the company;
6.
In
case of an unlisted Indian company, the rights issued to persons resident
outside India should not be at a price less than the price offered to
persons resident in India;
7.
Such
investment made through rights issue or bonus issue is subject to the
conditions as are applicable at the time of such issue;
8.
The
amount of consideration may be paid as inward remittance from abroad
through banking channels or out of funds held in NRE/ FCNR(B) account
maintained in accordance with the Foreign Exchange Management (Deposit)
Regulations, 2016;
9.
If the
original investment has been made on a non-repatriation basis, the amount
of consideration may also be paid by debit to the NRO account maintained in
accordance with the Foreign Exchange Management (Deposit) Regulations,
2016.
6.11.2 An individual who is a
person resident outside India exercising a right which was issued when he/
she was a person resident in India can hold the capital instruments so
acquired on exercising the right on a non-repatriation basis.
6.11.3 With effect from November
12, 2002, the Indian investee company could, on an application made to it,
allot to existing shareholders who are persons resident outside India
additional capital instruments (other than share warrants) as a rights
issue over and above their rights entitlement subject to individual or
sectoral caps, as the case may be.
6.11.4 Renunciation of rights
1.
A
person resident in India and a person resident outside India may subscribe
for additional shares over and above the shares offered on rights basis by
the company and also renounce the shares offered either in full or part
thereof in favour of a person named by them.
2.
The
facility at para 6.11.3 and para 6.11.4(1) would not be available to
investors who have been allotted such shares as Overseas Corporate Bodies
(OCBs).
3.
A
person resident outside India who has acquired a right from a person who
has renounced it may acquire capital instruments (other than share
warrants) against the said rights at the price laid down in para 6.11.1(5)
and 6.11.1(6), as applicable.
4.
The
capital instruments to be acquired on renunciation of rights shall be
subject to the same conditions including restrictions in regard to
repatriability as applicable to the original holding against which rights
issue has been made.
6.12 Issue of Employees’ Stock
Options Scheme (ESOP) and Sweat Equity Shares
6.12.1 An Indian company is
permitted to issue “employees’ stock option” and/ or “sweat equity shares”
to its employees/ directors or employees/ directors of its holding company
or joint venture or wholly owned overseas subsidiary/ subsidiaries who are
resident outside India, subject to the following conditions:
1.
The
ESOP is drawn either in terms of regulations issued under the Securities
and Exchange Board of India Act, 1992 or the Companies (Share Capital and
Debentures) Rules, 2014 notified by the Central Government under the
Companies Act 2013;
2.
The
“employee’s stock option”/ “sweat equity shares” are in compliance with the
sectoral cap applicable to the said company;
3.
Issue
of “employee’s stock option”/ “sweat equity shares” in a company where
investment by a person resident outside India is under the approval route
requires prior Government approval;
4.
Issue
of “employee’s stock option”/ “sweat equity shares” to a citizen of
Bangladesh/ Pakistan requires prior Government approval.
5.
Issue
of “sweat equity shares” to a person resident outside India was permitted
with effect from June 11, 2015.
6.12.2 An individual who is a
person resident outside India exercising an option which was issued when
he/ she was a person resident in India shall hold the capital instruments
so acquired on exercising the option on a non-repatriation basis.
6.13 Issue of Convertible Notes
by an Indian startup company
6.13.1 A person resident outside
India (other than an individual who is citizen of Pakistan or Bangladesh or
an entity which is registered/ incorporated in Pakistan or Bangladesh), is
permitted to invest in convertible notes issued by an Indian startup
company up to twenty five lakh rupees or more in a single tranche.
6.13.2 A startup company,
engaged in a sector where investment by a person resident outside India
requires Government approval, can issue convertible notes to a person
resident outside India only with such approval.
6.13.3 Issue of equity shares
against such convertible notes should be in compliance with the entry
route, sectoral caps, pricing guidelines and other attendant conditions for
foreign investment.
6.13.4 The payment consideration
can be received by inward remittance through banking channels or by debit
to the NRE/ FCNR (B)/ Escrow account maintained in accordance with the
Foreign Exchange Management (Deposit) Regulations, 2016. The escrow account
maintained for this purpose should be closed immediately after the
requirements are completed or within a period of six months, whichever is
earlier. Such an escrow account shall not be permitted to continue beyond a
period of six months.
6.13.5 An NRI or an OCI may
acquire convertible notes on a non-repatriation basis in accordance with
the instructions at para 6.4 of the Master Direction.
6.13.6 A person resident outside
India can acquire or transfer by way of sale, convertible notes, from or
to, a person resident in or outside India, provided the transfer takes
place in accordance with the entry routes and pricing guidelines laid down
in this Master Direction.
6.13.7 Convertible notes as an
investment option was permitted for startup companies with effect from
January 10, 2017.
6.14 Merger or demerger or
amalgamation of Indian companies
6.14.1 In case a Scheme of
merger or amalgamation of two or more Indian companies or a reconstruction
by way of demerger or otherwise of an Indian company has been approved by
the National Company Law Tribunal (NCLT)/ Competent Authority, the
transferee company or the new company, as the case may be, can issue
capital instruments to the existing holders of the transferor company who
are resident outside India, subject to the following conditions:
1.
The
transfer or issue should comply with entry routes, sectoral caps or
investment limits, as the case may be, and the attendant conditionalities
of foreign investment.
2.
In
case the foreign investment is likely to breach the Sectoral caps or the
attendant conditionalities, the transferor company or the transferee or the
new company should obtain necessary Government approval.
3.
The
transferor company or the transferee company or the new company should not
be in a sector prohibited for foreign investment.
6.14.2 In case a Scheme of
Arrangement for an Indian company has been approved by National Company Law
Tribunal (NCLT)/ Competent Authority, the Indian company can, with effect
from December 31, 2013, issue non-convertible redeemable preference shares
or non-convertible redeemable debentures to shareholders who are resident
outside India, including depositories that act as trustees for the ADR/ GDR
holders, out of its general reserves by way of distribution as bonus,
subject to the following conditions:
1.
The
original investment made in the Indian company by a person resident outside
India is in accordance with FEMA 20(R) and the conditions specified
therein;
2.
The
said issue is in accordance with the provisions of the Companies Act, 2013
and the terms and conditions, if any, stipulated in the scheme approved by
National Company Law Tribunal (NCLT)/ Competent Authority;
3.
The
Indian company is not engaged in any activity/ sector in which foreign
investment is prohibited.
7. Transfer of capital
instruments of an Indian company by or to a person resident outside India
A person resident outside India
who has invested in capital instruments of an Indian company or units in
accordance with FEMA 20(R) can transfer the capital instruments or units so
held subject to the terms and conditions specified in this para.
7.1 Transfer from a person
resident outside India by way of sale or gift to any person resident
outside India
7.1.1 A person resident outside
India, not being a non-resident Indian or an overseas citizen of India or
an 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.
7.1.2 It shall also include
transfer of capital instruments of an Indian company pursuant to merger,
de-merger and amalgamation of entities/ companies incorporated or
registered outside India.
7.1.3 Prior Government approval
is required to be obtained for any transfer in case the company is engaged
in a sector which requires Government approval.
7.1.4 Where the person resident
outside India is an FPI and the acquisition of capital instruments made
under para 6.2 of this Master Direction has resulted in a breach of the
applicable 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.
7.1.5 Indian companies which
have foreign investment are required 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.
7.1.6 Directions at 7.1.4 and
7.1.5 above will be effective from the date the second proviso to
sub-regulation 1 of regulation 10 of FEMA 20(R) is notified in the gazette
of India.
7.2 Transfer by an overseas
corporate body (OCB)
7.2.1 An OCB may transfer
capital instruments in accordance with the instructions given in the FAQs
on de-recognition of OCBs issued vide AP (DIR Series) Circular No.14
dated September 16, 2003.
7.3 Transfer by an NRI/ OCI by
way of gift or sale to any person resident outside India
7.3.1 An NRI or an OCI holding
capital instruments of an Indian company or units on repatriation basis can
transfer the same by way of sale or gift to any person resident outside
India.
7.3.2 Prior Government approval
is required for any transfer in case the company is engaged in a sector
which requires Government approval.
7.3.3 Where the capital
instruments acquired by an NRI or an OCI under the provisions of para 6.3
of this Master Direction has resulted in a breach of the applicable
aggregate NRI/ OCI limit or sectoral limits, the NRI or the OCI is required
to sell the capital instruments so acquired 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, as the case may be, 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, shall not be reckoned as a contravention under FEMA 20(R).
7.3.4 Directions at 7.3.3 above
will be effective from the date the second proviso to sub-regulation 2 of
regulation 10 of FEMA 20(R) is notified in the gazette of India.
7.4 Transfer by a NRI/ OCI
holding capital instruments on a non-repatriable basis or a person resident
in India by way of sale to any person resident outside India
7.4.1 A person resident in India
holding capital instruments of an Indian company or units, or an NRI or an
OCI or a company/ trust/ partnership firm incorporated outside India and
owned and controlled by NRIs or OCIs holding capital instruments of an
Indian company or units on a non-repatriation basis, may transfer the same
to a person resident outside India by way of sale, subject to the adherence
to entry routes, sectoral caps/ investment limits, pricing guidelines and
other attendant conditions as applicable for foreign investment and
documentation and reporting requirements for such transfers.
7.4.2 The entry routes, sectoral
caps/ investment limits, pricing guidelines and other attendant conditions,
however, will not apply in case the transferee is an NRI or an OCI or a
company/ trust/ partnership firm incorporated outside India and owned and
controlled by NRIs or OCIs acquiring such investment on a non-repatriation
basis.
7.5 Transfer by an NRI/ OCI
holding capital instruments on a non-repatriable basis by way of gift to
another NRI/ OCI who will hold such capital instruments on a non-repatriable
basis
7.5.1 An NRI or an OCI or a
company/ trust/ partnership firm incorporated outside India and owned and
controlled by NRIs or OCIs holding capital instruments of an Indian company
or units on a non-repatriation basis, is permitted to transfer the same by
way of gift to an NRI or an OCI or a company/ trust/ partnership firm
incorporated outside India and owned and controlled by NRIs or OCIs and the
the transferee shall hold them on a non-repatriable basis.
7.6 Sale by a person resident
outside India on a recognised stock exchange in India
7.6.1 A person resident outside
India, holding capital instruments of an Indian company or units in
accordance with FEMA 20(R) is permitted to transfer the same to a person
resident in India by way of sale/ gift or may sell the same on a recognised
stock exchange in India in the manner prescribed by SEBI.
7.6.2 The transfer by way of
sale is required to be in compliance with and is subject to the adherence
to pricing guidelines, documentation and reporting requirements prescribed
for such transfers.
7.6.3 Where the capital
instruments are held by the person resident outside India on a
non-repatriable basis, conditions at 7.6.2 above will not apply.
7.7 Transfer by way of gift by
an NRI/ OCI holding securities on a non-repatriable basis or a resident to
a person resident outside India
7.7.1 An NRI or an OCI holding
securities of an Indian company on a non-repatriation basis or a person
resident in India may transfer the securities so held by them to a person
resident outside India by way of gift with the prior approval of the
Reserve Bank and subject to the following conditions:
a.
The
donee is eligible to hold the securities under FEMA 20(R);
b.
The
gift does not exceed 5 percent of the paid up capital of the Indian
company/ each series of debentures/ each mutual fund scheme; this limit is
a cumulative limit for a donor to one particular donee.
c.
The
applicable sectoral cap in the Indian company is not breached;
d.
The
donor and the donee are relatives as defined in section 2(77) of the
Companies Act, 2013;
e.
The
value of security to be transferred by the donor together with any security
transferred to any person residing outside India as gift during the
financial year does not exceed the rupee equivalent of USD 50,000;
f.
The
application to the Reserve Bank shall be made through the Authorised Dealer
Bank.
7.8 Transfer by a person
resident outside India of capital instruments containing an optionality
clause
7.8.1 A person resident outside
India holding capital instruments of an Indian company containing an
optionality clause in accordance with FEMA 20(R) and exercising the option/
right, can exit without any assured return, subject to the pricing
guidelines prescribed under FEMA 20(R) and a minimum lock-in period of one
year or minimum lock-in period under FEMA 20(R), whichever is higher.
7.9 Deferred payment
consideration
7.9.1 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 per cent 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.
7.9.2 The total consideration
finally paid for the shares must be compliant with the applicable pricing
guidelines.
7.10 Opening of Escrow account
7.10.1 In case of transfer of
capital instruments between a person resident in India and a person
resident outside India, the person resident outside India is permitted to
open an Escrow account in accordance with the Foreign Exchange Management
(Deposit) Regulations, 2016.
7.10.2 Such Escrow account can
be funded by way of inward remittance through banking channels and/ or by
way of guarantee issued by an authorized dealer bank, subject to terms and
conditions as specified in the Foreign Exchange Management (Guarantees)
Regulations, 2000.
7.10.3 Where the transaction is
governed by SEBI guidelines/ regulations, operation of the Escrow accounts
for securities shall be in accordance with the relevant SEBI regulations,
if any.
7.11 Transfer by way of pledge
7.11.1 Any person being a
promoter of a company registered in India (borrowing company), which has
raised external commercial borrowing (ECB) in compliance with the Foreign
Exchange Management (Borrowing and Lending in Foreign Exchange)
Regulations, 2000 may pledge the shares of the borrowing company or that of
its associate resident companies for the purpose of securing the ECB raised
by the borrowing company subject to the following conditions:
a.
the
period of such pledge shall be co-terminus with the maturity of the
underlying ECB;
b.
in
case of invocation of pledge, transfer shall be in accordance with
Regulations laid down in FEMA 20(R);
c.
the
Statutory Auditor has certified that the borrowing company will utilise/
has utilised the proceeds of the ECB for the permitted enduse/s only;
d.
no
person shall pledge any such share unless a no-objection has been obtained
from an Authorised Dealer bank that the above conditions have been complied
with.
7.11.2 Any person resident
outside India holding capital instruments in an Indian company or units may
pledge the capital instruments or units, as the case may be:
(a) In favour of a bank in India
to secure the credit facilities being extended to such Indian company for
bona-fide purposes subject to the following conditions:
i.
in
case of invocation of pledge, transfer should be in accordance with
instructions in vogue at the time of creation of pledge;
ii.
submission
of a declaration/ annual certificate from the statutory auditor of the
investee company that the loan proceeds will be/ have been utilized for the
declared purpose;
iii.
the
Indian company has to follow the relevant SEBI disclosure norms, if any;
and
iv.
pledge
in favour of the lender (bank) would be subject to compliance with the
Section 19 of the Banking Regulation Act, 1949.
v.
the
conditions at (i) to (iv) above will apply suitably for units.
(b) In favour of an overseas
bank to secure the credit facilities being extended to such person or a
person resident outside India who is the promoter of such Indian company or
the overseas group company of such Indian company, subject to the following
conditions:
i.
loan
is availed only from an overseas bank;
ii.
loan
is utilized for genuine business purposes overseas and not for any
investments either directly or indirectly in India;
iii.
overseas
investment should not result in any capital inflow into India;
iv.
in
case of invocation of pledge, transfer should be in accordance with the
policy in vogue at the time of creation of pledge; and
v.
submission
of a declaration/ annual certificate from a Chartered Accountant/ Certified
Public Accountant of the non-resident borrower that the loan proceeds will
be/ have been utilized for the declared purpose;
vi.
the
conditions at (i) to (v) above will apply suitably for units.
(c) In favour of a Non-Banking
Financial Company registered with the Reserve Bank to secure the credit
facilities being extended to such Indian company for bona fide purposes,
subject to the following conditions:
i.
only
the equity shares listed on a recognised stock exchange/s in India can be
pledged in favour of the NBFCs;
ii.
in
case of invocation of pledge, transfer of shares should be in accordance
with the credit concentration norm as stated in the Master Direction –
Non-Banking Financial Company – Non-Systemically Important Non-Deposit
taking Company (Reserve Bank) Directions, 2016 (Para 22) and Master
Direction – Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank)
Directions, 2016 (Para 22)
iii.
The AD
may obtain a board resolution ‘ex ante’, passed by the Board of Directors
of the investee company, that the loan proceeds received consequent to
pledge of shares will be utilised by the investee company for the declared
purpose;
iv.
the AD
may also obtain a certificate ‘ex post’, from the statutory auditor
of investee company, that the loan proceeds received consequent to pledge
of shares, have been utilised by the investee company for the declared
purpose;
v.
the
Indian company has to follow the relevant SEBI disclosure norms, as
applicable;
vi.
under
no circumstances, the credit concentration norms should be breached by the
NBFC. If there is a breach on invocation of pledge, the shares should be
sold and the breach shall be rectified within a period of 30 days from the
date of invocation of pledge.
7.11.2.1 The Authorised Dealer bank
should satisfy itself of the compliance of the stipulated conditions.
7.11.3 Capital instruments of an
Indian company or units transferred by way of pledge should be
unencumbered.
7.11.4 The company shall obtain
no-objection certificate from the existing lenders, if any.
7.11.5 In case of invocation of
pledge, transfer of capital instruments of an Indian company or units
pledged shall be in accordance with entry routes, sectoral caps/ investment
limits, pricing guidelines and other attendant conditions at the time of
creation of pledge.
7.11.6 Any other transfer by way
of pledge would require the prior approval of the Reserve Bank. Cases may
be forwarded to the Reserve Bank with the following documents:
a.
A copy
of the Board Resolution passed by the non-resident company/ies approving
the pledge of security acquired in terms of FEMA 20 (R) (number/ percentage
of securities to be pledged) of Investee Company held by them for securing
the loan facility in favour of the lender/s.
b.
A copy
of the Board Resolution passed by the investee company approving pledge of
securities acquired in terms of FEMA 20 (R) in favour of the lender for the
loan facility availed by the investee company.
c.
A copy
of the loan agreement/ pledge agreement containing security clause duly certified
by the company secretary, requiring the pledge of shares of Investee
Company.
d.
The
details of the facility availed/ proposed to be availed.
e.
The
details of reporting of the acquisition of the security as prescribed in
terms of FEMA 20 (R), if any.
7.12. Transfer from a resident
to a person resident outside India where the investee company is in the
financial sector
7.12.1 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.
7.13 Mode of payment
7.13.1 The amount of
consideration for transfer of capital instruments between a person resident
in India and a person resident outside India should be received from abroad
or remitted from India, as the case may be, through banking channels in
India or paid out from or received in, as the case may be, NRE/ FCNR(B)/
Escrow accounts maintained in accordance with the Foreign Exchange
Management (Deposit) Regulations, 2016.
7.13.2 In case an investment is
held on a non-repatriation basis, in addition to 7.13.1 above, the amount
of consideration for transfer may be paid out from or received in, as the
case may be, NRO account maintained in accordance with the Foreign Exchange
Management (Deposit) Regulations, 2016.
8. Pricing guidelines
8.1 Capital instruments issued
by a company to a person resident outside India
8.1.1 The price of capital
instruments of an Indian company issued by it to a person resident outside
India should not be less than:
a.
the
price worked out in accordance with the relevant SEBI guidelines in case of
a listed Indian company or in case of a company going through a delisting
process as per the SEBI (Delisting of Equity Shares) Regulations, 2009; or
b.
the
valuation of capital instruments done as per any internationally accepted
pricing methodology for valuation on an arm’s length basis duly certified
by a Chartered Accountant or a SEBI registered Merchant Banker or a
practicing Cost Accountant, in case of an unlisted Indian Company.
8.1.2 In case of convertible
capital instruments, the price/ conversion formula of the instrument is
required to be determined upfront at the time of issue of the instrument.
The price at the time of conversion should not in any case be lower than
the fair value worked out, at the time of issuance of such instruments, in
accordance with the extant FEMA regulations.
8.2 Capital instruments
transferred by a person resident in India to a person resident outside
India
8.2.1 The price of capital
instruments of an Indian company transferred by a person resident in India
to a person resident outside India should not be less than:
a.
the
price worked out in accordance with the relevant SEBI guidelines in case of
a listed Indian company; or
b.
the
price at which a preferential allotment of shares can be made under the
SEBI Guidelines, as applicable, in case of a listed Indian company or in
case of a company going through a delisting process as per the SEBI
(Delisting of Equity Shares) Regulations, 2009. The price should be
determined for such duration as specified in the SEBI Guidelines, preceding
the relevant date, which shall be the date of purchase or sale of shares.
In case of a company which has completed a delisting process, the price as
determined for such duration as specified in the SEBI Guidelines will apply
for those shares which have not been tendered to the company during the
delisting process; or
c.
the
valuation of capital instruments done as per any internationally accepted
pricing methodology for valuation on an arm’s length basis duly certified
by a Chartered Accountant or a SEBI registered Merchant Banker or a
practicing Cost Accountant, in case of an unlisted Indian Company.
8.3 Capital instruments
transferred by a person resident outside India to a person resident in
India
8.3.1 The price of capital
instruments of an Indian company transferred by a person resident outside
India to a person resident in India should not exceed:
a.
the
price worked out in accordance with the relevant SEBI guidelines in case of
a listed Indian company;
b.
the
price at which a preferential allotment of shares can be made under the
SEBI Guidelines, as applicable, in case of a listed Indian company or in
case of a company going through a delisting process as per the SEBI
(Delisting of Equity Shares) Regulations, 2009. The price is determined for
such duration as specified in the SEBI Guidelines, preceding the relevant
date, which shall be the date of purchase or sale of shares;
c.
the
valuation of capital instruments done as per any internationally accepted
pricing methodology for valuation on an arm’s length basis duly certified
by a Chartered Accountant or a SEBI registered Merchant Banker or a
practicing Cost Accountant, in case of an unlisted Indian Company.
8.3.2 The guiding principle
would be that the person resident outside India is not guaranteed any
assured exit price at the time of making such investment/ agreement and
shall exit at the price prevailing at the time of exit.
8.4 Swap of capital instruments
8.4.1 In case of swap of capital
instruments, irrespective of the amount, valuation will have to be made by
a Merchant Banker registered with SEBI or an Investment Banker outside
India registered with the appropriate regulatory authority in the host
country.
8.5 Subscription to Memorandum
of Association
8.5.1 Where shares in an Indian
company are issued to a person resident outside India in compliance with
the provisions of the Companies Act, 2013, by way of subscription to
Memorandum of Association, such investments shall be made at face value
subject to entry route and sectoral caps.
8.6 Partly paid shares
8.6.1 The pricing of the partly
paid equity shares shall be determined upfront.
8.7 Share warrants
8.7.1 In case of share warrants,
their pricing and the price/ conversion formula shall be determined
upfront.
8.7.2 The price at the time of
conversion should not in any case be lower than the fair value worked out,
at the time of issuance of such warrants.
8.8 Investment in an LLP
8.8.1 Investment in an LLP
either by way of capital contribution or by way of acquisition/ transfer of
profit shares, should not be less than the fair price worked out as per any
valuation norm which is internationally accepted/ adopted as per market
practice (hereinafter referred to as "fair price of capital
contribution/ profit share of an LLP") and a valuation certificate to
that effect should be issued by a Chartered Accountant or by a practicing
Cost Accountant or by an approved valuer from the panel maintained by the
Central Government.
8.9 Transfer of capital
contribution/ profit share of an LLP
8.9.1 In case of transfer of
capital contribution/ profit share of an LLP from a person resident in
India to a person resident outside India, the transfer should be for a
consideration not less than the fair price of capital contribution/ profit
share of an LLP.
8.9.2 In case of transfer of
capital contribution/ profit share of an LLP from a person resident outside
India to a person resident in India, the transfer should be for a
consideration which is not more than the fair price of the capital
contribution/ profit share of an LLP.
8.10 Non-applicability of
pricing guidelines
8.10.1 The pricing guidelines
will not apply for investment in capital instruments by a person resident
outside India on non-repatriation basis.
8.10.2 The pricing guidelines
will not be applicable for any transfer by way of sale done in accordance
with SEBI regulations where the pricing is prescribed by SEBI. A Chartered
Accountant’s Certificate to the effect that relevant SEBI regulations/
guidelines have been complied with has to be attached to the form FC-TRS
filed with the AD bank
9. Downstream Investment
9.1 Definitions
9.1.1 ‘Ownership of an Indian
company’ is the beneficial holding of more than 50 percent of the capital
instruments of such company.
9.1.2 ‘Ownership of an LLP’ is
the contribution of more than 50 percent in its capital and having majority
profit share.
9.1.3 ‘Company owned by resident
Indian citizens’ is an Indian company where ownership is vested in resident
Indian citizens and/ or Indian companies, which are ultimately owned and
controlled by resident Indian citizens.
9.1.4 An ‘LLP owned by resident
Indian citizens’ is an LLP where ownership is vested in resident Indian
citizens and/ or Indian entities, which are ultimately owned and controlled
by resident Indian citizens.
9.1.5 ‘Company owned by persons
resident outside India’ is an Indian company whose ownership is vested in
persons resident outside India.
9.1.6 An ‘LLP owned by persons
resident outside India’ is an LLP whose ownership is vested with persons
resident outside India.
9.1.7 ‘Control’ of a company is
the right to appoint majority of the directors or to control the management
or policy decisions including by virtue of their shareholding or management
rights or shareholders agreement or voting agreement.
9.1.8 For the purpose of LLP,
‘Control’ is the right to appoint majority of the designated partners,
where such designated partners, with specific exclusion to others, have
control over all the policies of an LLP.
9.1.9 ‘Company controlled by
resident Indian citizens’ is an Indian company, the control of which is
vested in resident Indian citizens and/ or Indian companies which are
ultimately owned and controlled by resident Indian citizens.
9.1.10 An ‘LLP controlled by
resident Indian citizens’ is an LLP, the control of which is vested in
resident Indian citizens and/ or Indian entities, which are ultimately
owned and controlled by resident Indian citizens.
9.1.11 ‘Company controlled by
persons resident outside India’ is an Indian company the control of which
is vested with persons resident outside India.
9.1.12 An ‘LLP controlled by
persons resident outside India’ is an LLP the control of which is vested
with persons resident outside India.
9.1.13 ‘Downstream Investment’
is investment made by an Indian entity which has received foreign
investment or an Investment Vehicle in the capital instruments or the
capital, as the case may be, of another Indian entity.
9.1.14 ‘Holding Company’ will
have the same meaning as defined in Companies Act, 2013.
9.1.15 ‘Indirect Foreign
Investment’ is downstream investment received by an Indian entity from:
a.
another
Indian entity (IE) which has received foreign investment and which is not
owned and not controlled by resident Indian citizens or is owned or
controlled by persons resident outside India; or
b.
an
investment vehicle whose sponsor or manager or investment manager is not
owned and not controlled by resident Indian citizens or is owned or
controlled by persons resident outside India.
9.1.16 ‘Total Foreign
Investment’ is the sum of foreign investment and indirect foreign
investment which will be reckoned on a fully diluted basis;
9.1.17 ‘Strategic downstream
investment’ means downstream investment by banking companies incorporated
in India in their subsidiaries, joint ventures and associates.
9.2 Prohibition
9.2.1 No person resident in
India other than an Indian entity can receive Indirect Foreign Investment.
9.3 Conditions for downstream
investment that is treated as Indirect Foreign Investment for the investee
Indian Entity
9.3.1 An Indian entity which has
received indirect foreign investment is required to comply with the entry
route, sectoral caps, pricing guidelines and other FDI linked performance
conditions as applicable for foreign investment.
9.3.2 Downstream investment by
an LLP 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 is allowed in an Indian company operating in sectors
where foreign investment up to 100 percent is permitted under automatic
route and there are no FDI linked performance conditions.
9.3.3 Indirect foreign
Investment is permitted in an LLP in sectors where foreign investment is
allowed 100% under automatic route and there are no FDI linked performance
conditions.
9.3.4 If the sponsors/ managers/
investment managers of an investment vehicle are individuals, for the
downstream investment made by such investment vehicle not to be considered
as Indirect Foreign Investment for the investee, the sponsors/ managers/
investment managers of the investment vehicle should be resident Indian
citizens. In case the sponsor/ manager/ investment manager is organised in
any other form, SEBI will determine whether it is foreign owned and/ or
controlled or not.
9.3.5 The downstream investment
that is treated as Indirect Foreign Investment for the investee Indian
entity should have the approval of the Board of Directors as also a
Shareholders' Agreement, if any, of the investing Indian entity.
9.3.6 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.
Subscription by persons resident outside India to non-convertible
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.
9.3.7 Downstream investments
which is treated as Indirect Foreign Investment for the investee Indian
entity can be made through internal accruals. For this purpose, internal
accruals will mean profits transferred to reserve account after payment of
taxes.
9.3.8 When a company which does
not have any operations makes downstream investment which is treated as
Indirect Foreign Investment for the investee Indian entity or commences
business(s), it will have to comply with the relevant sectoral conditions
on entry route, conditionalities and caps.
9.4 Downstream investment/s under
Corporate Debt Restructuring (CDR), mechanism
9.4.1 With effect from July 31,
2012, downstream investment/s made 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 is owned or controlled by persons resident outside India, under
Corporate Debt Restructuring (CDR), or other loan restructuring mechanism,
or in trading book, or for acquisition of shares due to defaults in loans,
will not be considered as indirect foreign investment.
9.4.2 Strategic downstream
investment by a banking company referred to at 9.4.1 above will be
considered as indirect foreign investment for the investee company.
9.5. Guidelines for calculation
of total foreign investment in Indian companies
9.5.1 Any equity holding by a
person resident outside India resulting from conversion of any debt
instrument under any arrangement shall be reckoned for total foreign
investment.
9.5.2 FCCBs and DRs having underlying
of instruments in the nature of debt will not be reckoned for total foreign
investment.
9.5.3 The methodology for
calculating total foreign investment would apply at every stage of
investment in Indian companies and thus in each and every Indian company.
9.5.4 For the purpose of
downstream investment, the portfolio investment held as on March 31 of the
previous financial year in the Indian company making the downstream
investment will be considered for computing the total foreign investment of
the investee Indian entity.
9.5.5 The indirect foreign
investment received by a wholly owned subsidiary of an Indian company will
be limited to the total foreign investment received by the company making
the downstream investment
9.6 Conditions for exit
9.6.1 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:
a.
a
person resident outside India, subject to reporting requirements in Form
FCTRS. However, pricing guidelines will not apply for such a transfer.
b.
a
person resident in India subject to adherence to pricing guidelines.
c.
an
Indian company with foreign investment and not owned and not controlled by
resident Indian citizens or owned or controlled by persons resident outside
India. Pricing and reporting guidelines will not apply.
9.6.2 The instructions at 9.6.1
above will be construed accordingly for an LLP.
9.7 Responsibility for
compliance
9.7.1 The first level Indian
company making downstream investment will be responsible for ensuring
compliance with the provisions of these regulations for the downstream
investment made by it at second level and so on and so forth. Such first
level company shall obtain a certificate to this effect from its statutory
auditor on an annual basis. Such compliance of FEMA provisions shall be
mentioned in the Director's report in the Annual Report of the Indian
company.
9.7.2 In case the statutory
auditor has given a qualified report, the same should be immediately
brought to the notice of the Regional Office of the Reserve Bank in whose
jurisdiction the Registered Office of the company is located and shall also
obtain acknowledgement from the RO.
9.7.3 The instructions at 9.7.1
above will be construed accordingly for an LLP
9.8 Applicability of downstream
investment guidelines
9.8.1 Downstream investment
which is treated as indirect foreign investment for the investee Indian
entity made prior to February 13, 2009 would not require any modification
to conform to FEMA 20(R). All other investments, after the said date, would
come under its ambit.
9.8.2 Downstream investments
which is treated as indirect foreign investment for the investee Indian
entity made between February 13, 2009 and June 21, 2013 which was not in
conformity with the downstream investment guidelines should have been
intimated to the Reserve Bank by October 3, 2013 for treating such cases as
compliant with FEMA 20(R).
10. Taxes and remittance of sale
proceeds
10.1 Taxes
10.1.1 All transaction relating
to foreign investment in India are required to be undertaken through
banking channels in India and are subject to payment of applicable taxes
and other duties/ levies in India.
10.2 Remittance of sale proceeds
10.2.1 Remittance of sale
proceeds of an Indian security held by a person resident outside India will
have to be made only in accordance with FEMA 20(R).
10.2.2 An authorised dealer bank
may permit the remittance of sale proceeds of a security (net of applicable
taxes) to the seller resident outside India provided:
a.
the
security was held by the seller on repatriation basis; and
b.
either
the security has been sold in compliance with the pricing guidelines or the
Reserve Bank's approval has been obtained in other cases for sale of the
security and remittance of the sale proceeds thereof.
Annex
1
Purchase/
Sale of capital instruments of an Indian company
1. Purchase/ sale of capital
instruments of an Indian company by a person resident outside India
1.1 Issue by an Indian company
1.1.1 An Indian company is
permitted to issue capital instruments to a person resident outside India
subject to entry routes, sectoral caps and attendant conditionalities
specified for foreign investment;
1.2 Purchase on a stock exchange
in India
1.2.1 A person resident outside
India may purchase capital instruments of a listed Indian company on a
stock exchange in India provided:
a.
The
person resident outside India making the investment has already acquired
control of such company in accordance with SEBI (Substantial Acquisition of
Shares and Takeover) Regulations, 2011 and continues to hold such control;
b.
The
amount of consideration is paid as per the mode of payment prescribed in
this annex or out of the dividend payable by the Indian investee company in
which the person resident outside India has acquired and continues to hold
control in accordance with SEBI (Substantial Acquisition of Shares and
Takeover) Regulations, 2011, provided the right to receive dividend is
established and the dividend amount has been credited to an SNRR account
opened in terms of Foreign Exchange Management (Deposit) Regulations, 2016
for acquisition of shares on the recognised stock exchange.
1.3 Issue by a wholly owned
subsidiary
1.3.1 A wholly owned subsidiary
set up in India by a non-resident entity, operating in a sector where 100
percent foreign investment is allowed under the automatic route and there
are no FDI linked performance conditions, may issue capital instruments to
the said non-resident entity against pre-incorporation/ preoperative
expenses incurred by the said non-resident entity up to a limit of five per
cent of its authorised capital (as defined in the Companies Act, 2013) or
USD 500,000 whichever is less, subject to the following conditions:
a.
Form
FC-GPR, as prescribed in the Master Direction on Reporting as amended from
time to time, is filed by the Indian company within thirty days from the
date of issue of capital instruments but not later than one year from the
date of incorporation.
b.
A
certificate issued by the statutory auditor of the Indian company that the
amount of pre-incorporation/ pre-operative expenses against which capital
instruments have been issued has been utilized for the purpose for which it
was received should be submitted with the Form FC-GPR.
1.3.2 Pre-incorporation/
pre-operative expenses will include amounts remitted to the investee
Company’s account or to the investor’s account in India if it exists or to
any consultant or attorney or to any other material/ service provider for
expenditure relating to incorporation or necessary for commencement of
operations.
1.4 Other modes of issue
1.4.1 An Indian company may
issue capital instruments to a person resident outside India against swap
of capital instruments if the Indian investee company is engaged in an
automatic route sector.
1.4.2 An Indian company may
issue equity shares (excluding partly paid shares) to a person resident
outside India against any funds payable by it to such person, the
remittance of which is permitted under the Act or the rules or the
regulations framed or directions issued thereunder or does not require
prior permission of the Central Government or the Reserve Bank under the
Act or the rules or the regulations framed or directions issued thereunder
subject to the following conditions:
a.
Issue
of such shares that require Government approval or import dues deemed as
ECB or trade credit or payables against import of second hand machinery
will be dealt in accordance with respective guidelines;
b.
The issue
of such shares under this provision shall be subject to tax laws as
applicable to the funds payable and the conversion to equity should be net
of applicable taxes
1.4.3 An Indian company may
issue equity shares (other than partly paid shares) to a person resident
outside India against any funds payable by it to such person, the
remittance of which has been permitted by the Reserve Bank under the Act or
the rules or the regulations framed or directions issued thereunder.
1.4.4 In case where permission
has been granted by the Reserve Bank for making remittance as stated at
1.4.3 above, the Indian company may issue equity shares (other than partly
paid shares) against such remittance provided all regulatory actions with
respect to the delay or contravention under the Act or the rules or the
regulations framed thereunder have been completed.
1.4.5 An Indian company may
issue capital instruments to a person resident outside India with prior
Government approval against:
(a) Swap of capital instruments
if the Indian investee company is engaged in a sector under Government
route;
(b) Import of capital goods/
machinery/ equipment (excluding second-hand machinery) subject to the
following conditions:
i.
The
import of capital goods, machineries, etc., made by a person resident in
India, is in accordance with the Foreign Trade Policy notified by the
Directorate General of Foreign Trade (DGFT) and the regulations on imports
issued under the Act;
ii.
There
is an independent valuation of the capital goods/ machineries/ equipment by
a third party entity, preferably an independent valuer from the country of
import along with production of copies of documents/ certificates issued by
the customs authorities towards assessment of the fair-value of such
imports;
iii.
The
application should clearly indicate the beneficial ownership and identity
of the importer company as well as the overseas entity; and
iv.
Applications
(complete in all respects) for capitalization should be submitted within
180 days from the date of shipment of goods.
(c) Pre-operative/
pre-incorporation expenses (including payments of rent etc.), subject to
the following conditions:
i.
Submission
of FIRC for remittance of funds by the overseas promoters for the expenditure
incurred;
ii.
Verification
and certification of the pre-incorporation/ pre-operative expenses by the
statutory auditor;
iii.
Payments
should be made by the foreign investor to the company directly or through
the bank account opened by the foreign investor as provided under the Act
or the rules or the regulations framed thereunder; and
iv.
The
application (complete in all respects) for capitalization being made within
a period of 180 days from the date of incorporation of the company.
2. Mode of payment, issue of capital
instruments and refund
2.1 The amount of consideration
should be paid as inward remittance from abroad through banking channels or
out of funds held in NRE/ FCNR(B)/ Escrow account maintained in accordance
with the Foreign Exchange Management (Deposit) Regulations, 2016.
2.2 The amount of consideration
will include issue of equity shares by an Indian company against any funds
payable by it to the investor and also swap of capital instruments where
the Indian investee company is engaged in an automatic route sector.
2.3 If the capital instruments
are not issued by the Indian company within sixty days from the date of
receipt of the consideration, the amount so received has to be refunded to
the person concerned by outward remittance through banking channels or by
credit to his NRE/ FCNR(B) accounts, as the case may be, within fifteen
days from the date of completion of sixty days.
2.4 In case of partly paid
equity shares, the period of 60 days will be reckoned from the date of
receipt of each call payment. The forfeiture of the amount paid upfront on
non-payment of call money shall be in accordance with the provisions of the
Companies Act, 2013 and Income Tax Act, 1961 as applicable
2.5 Refund may be permitted by
an authorised dealer provided it is satisfied:
a.
with
the bonafides of the applicant;
b.
that
the funds were received as per the mode of payment prescribed in para 2.1
above;
c.
that
no part of remittance represents interest on the funds received.
2.6 Prior approval of the
Reserve Bank will 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.
Non-compliance of instructions at 2.3 above shall be a contravention of
FEMA 20(R) notwithstanding the fact that interest for delayed refund has
been paid as per Companies Act, 2013.
2.7 The Indian company issuing
capital instruments stated in this annex is permitted to open a foreign
currency account with an Authorised Dealer in India in accordance with
Foreign Exchange Management (Foreign currency accounts by a person resident
in India) Regulations, 2015.
3. Remittance of sale proceeds
3.1 The sale proceeds (net of
taxes) of the capital instruments can be remitted outside India or credited
to the NRE/ FCNR(B) account of the person concerned.
Annex
2
Purchase/
Sale of capital instruments of a listed Indian company on a recognised
stock exchange in India by Foreign Portfolio Investors
1. Purchase/ sale of capital
instruments
1.1 A Foreign Portfolio Investor
(FPI) may purchase or sell capital instruments of an Indian company on a
recognised stock exchange in India.
1.2 The total holding by each
FPI or an investor group as referred in SEBI (FPI) Regulations, 2014,
should be less than 10 per cent of the total paid-up equity capital on a
fully diluted basis or less than 10 per cent of the paid-up value of each
series of debentures or preference shares or warrants issued by an Indian
company and the total holdings of all FPIs put together should not exceed
24 per cent of paid-up equity capital on a fully diluted basis or paid up
value of each series of debentures or preference shares or warrants. The
limit of 10 percent and 24 percent will be called individual and aggregate
limit, respectively.
1.3 The aggregate limit of 24
percent may be increased by the Indian company concerned up to the sectoral
cap/ statutory ceiling, as applicable, with the approval of its Board of
Directors and its General Body through a resolution and a special
resolution, respectively.
1.4 In case the total holding of
an FPI increases to 10 percent or more of the total paid-up equity capital
on a fully diluted basis or 10 per cent or more of the paid-up value of
each series of debentures or preference shares or warrants issued by an
Indian company, the total investment so made by the FPI will be
re-classified as FDI subject to the conditions as specified by SEBI in this
regard and the investee company and the investor complying with the
reporting requirements prescribed in Regulation 13 of FEMA 20(R).
1.5 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.
1.6 An FPI is permitted to
purchase capital instruments of an Indian company through public offer/
private placement, subject to the individual and aggregate limits and the
conditions specified below:
a.
in
case of Public Offer, the price of the shares to be issued is not less than
the price at which shares are issued to residents, and
b.
in
case of issue by private placement, the price is not less than the price
arrived in terms of SEBI guidelines or not less than the fair price worked
out as per any internationally accepted pricing methodology for valuation
of shares on arm’s length basis, duly certified by a SEBI registered
Merchant Banker or Chartered Accountant, as applicable
1.7 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:
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.
1.8 Investments will be subject
to the limits and margin requirements prescribed by the Reserve Bank/ SEBI.
2. Mode of payment
2.1 The amount of consideration
for purchase of capital instruments should be received from abroad through
banking channels through inward remittance or out of funds held in a
foreign currency account and/ or a Special Non-Resident Rupee (SNRR)
account maintained in accordance with the Foreign Exchange Management
(Deposit) Regulations, 2016.
2.2 The foreign currency account
and SNRR account can be used only and exclusively for transactions under
this Annex.
3. Remittance of sale proceeds
3.1 The sale proceeds (net of
taxes) of the investments made can be remitted outside India or may be
credited to the foreign currency account or SNRR account of the FPI.
4. Saving
4.1 All investments made by
deemed FPIs in accordance with the regulations prior to their registration
as FPIs are valid and taken into account for computation of aggregate
limits.
Annex
3
Purchase/
Sale of Capital Instruments of a listed Indian company on a recognised
stock exchange in India by Non-Resident Indian (NRI) or Overseas Citizen of
India (OCI) on repatriation basis
1. Purchase/ sale of capital
instruments
1.1 A Non-resident Indian (NRI)
or an Overseas Citizen of India (OCI) is allowed to purchase or sell
capital instruments of a listed Indian company on repatriation basis, on a
recognised stock exchange in India, subject to the following conditions:
a.
The
purchase and sale is done through a designated authorised dealer branch;
b.
The
total holding by any individual NRI or OCI should not exceed five percent
of the total paid-up equity capital on a fully diluted basis or should not
exceed five percent of the paid-up value of each series of debentures or
preference shares or warrants issued by an Indian company and the total
holdings of all NRIs and OCIs put together should not exceed ten percent of
the total paid-up equity capital on a fully diluted basis or should not
exceed ten percent of the paid-up value of each series of debentures or
preference shares or warrants;
c.
the
aggregate ceiling of ten per cent can be raised to twenty-four per cent if
a special resolution to that effect is passed by the General Body of the
Indian company;
2. Mode of payment
2.1 The amount of consideration
for purchase of capital instruments should be received as an inward
remittance from abroad through banking channels or out of funds held in a
Non-Resident External (NRE) account maintained in accordance with the
Foreign Exchange Management (Deposit) Regulations, 2016.
2.2 The NRE account will be
designated as an NRE (PIS) Account and the designated account should be
used exclusively for putting through transactions permitted under this
annex.
2.2.1 The specific credits
permitted for the NRE (PIS) account are as follows:
a.
Inward
remittances from abroad in foreign exchange through banking channels;
b.
Transfer
from the NRI’s/ OCI’s other NRE accounts or FCNR (B) accounts maintained in
accordance with the Foreign Exchange Management (Deposit) Regulations,
2016;
c.
Sale
proceeds (net of taxes) of capital instruments acquired on repatriation
basis in accordance with instructions contained in this annex and sold on
stock exchange; and
d.
Dividend
or income earned on investment made on repatriation basis in accordance
with instructions contained in this annex.
2.2.2 The specific debits
permitted for the NRE (PIS) account are as follows:
a.
Outward
remittances of dividend or income earned on investment made on repatriation
basis in accordance with instructions contained in this annex;
b.
Amounts
paid on account of purchase of capital instruments on repatriation basis on
stock exchanges in accordance with instructions contained in this annex;
c.
Any
charges on account of sale/ purchase of capital instruments in accordance
with instructions contained in this annex; and
d.
Remittances
outside India or transfer to NRE/ FCNR (B) accounts of the NRI/ OCI or any
other person eligible to maintain such accounts in accordance with the
Foreign Exchange Management (Deposit) Regulations, 2016.
3. Remittance of sale proceeds
The sale proceeds (net of taxes)
of the capital instruments can be remitted outside India or may be credited
to NRE (PIS) Account of the person concerned.
4. Saving
Any account designated as NRO
(PIS) shall be re-designated as NRO account.
Annex
4
Investment
on non-repatriation basis
A. Purchase or Sale of Capital Instruments
or convertible notes of an Indian company or Units or contribution to the
capital of an LLP by Non-Resident Indian (NRI) or Overseas Citizen of India
(OCI) on Non-Repatriation basis
1. Purchase/ sale of capital
instruments or convertible notes or units or contribution to the capital of
an LLP
1.1 A Non-resident Indian (NRI)
or an Overseas Citizen of India (OCI), including a company, a trust and a
partnership firm incorporated outside India and owned and controlled by
NRIs or OCIs, is permitted to purchase/ contribute to the following on a
non-repatriation basis:
a.
Any
capital instrument issued by a company without any limit either on the
stock exchange or outside it.
b.
Units
issued by an investment vehicle without any limit, either on the stock
exchange or outside it.
c.
The
capital of a Limited Liability Partnership without any limit.
d.
Convertible
notes issued by a startup company in accordance with FEMA 20(R).
1.2 The investment detailed at
1.1 above will be deemed to be domestic investment at par with the
investment made by residents.
1.3 An NRI or an OCI including a
company, a trust and a partnership firm incorporated outside India and
owned and controlled by NRIs or OCIs, cannot invest in capital instruments
or units of a Nidhi company or a company engaged in agricultural/
plantation activities or real estate business or construction of farm
houses or dealing in Transfer of Development Rights.
2. Mode of Payment
2.1 The amount of consideration
should be received from abroad through banking channels or paid out of
funds held in NRE/ FCNR(B)/ NRO accounts maintained in accordance with the
Foreign Exchange Management (Deposit) Regulations, 2016.
3. Sale/ maturity proceeds
3.1 The sale/ maturity proceeds
(net of applicable taxes) of capital instruments purchased or disinvestment
proceeds of an LLP should be credited only to the NRO account of the
investor, irrespective of the type of account from which the consideration
was paid.
3.2 The amount invested in
capital instruments of an Indian company or the consideration for
contribution to the capital of an LLP and the capital appreciation thereon
cannot be repatriated abroad.
B. Investment in a firm or a
proprietary concern
1. Contribution to capital of a
firm or a proprietary concern
1.1 An NRI or an OCI is
permitted to invest, on a non-repatriation basis, by way of contribution to
the capital of a firm or a proprietary concern in India.
1.2 The investee firm or
proprietary concern should not be engaged in any agricultural/ plantation
activity or print media or real estate business i.e., dealing in land and
immovable property with a view to earning profit or earning income
therefrom.
2. Mode of payment
2.1 The amount of consideration
should be received from abroad through banking channels or paid out of
funds held in NRE/ FCNR(B)/ NRO accounts maintained in accordance with the
Foreign Exchange Management (Deposit) Regulations, 2016.
3. Sale/ maturity proceeds
3.1 The disinvestment proceeds
should be credited only to the NRO account of the person concerned,
irrespective of the type of account from which the consideration was paid.
3.2 The amount invested for
contribution to the capital of a firm or a proprietary concern and the capital
appreciation thereon cannot be repatriated abroad.
Annex
5
Purchase
and sale of securities other than capital instruments by a person resident
outside India
1. Permission to person resident
outside India
1.1 Permission to Foreign
Portfolio Investors (FPIs)
1.1.1 An FPI is permitted to
purchase the following instruments on repatriation basis subject to the
terms and conditions specified by the Securities and Exchange Board of
India and the Reserve Bank:
(a) Dated Government securities/
treasury bills.
i.
With
effect from July 23, 2014, FPIs are not allowed to invest in treasury bills.
ii.
FPIs
are required to invest in Government securities with a minimum residual
maturity of three years. There is, however, no lock-in period and FPIs are
free to sell the securities to the domestic investors.
iii.
FPIs
can invest in government securities, the coupons received on their existing
investments in government securities. These investments will be outside the
applicable limit for investments by FPIs in government securities.
(b) Commercial papers issued by
an Indian company. FPIs are not be allowed to make any further investment
in CPs after February 03, 2015.
(c) Units of domestic mutual
funds. FPIs are not permitted to make investment in liquid and money market
mutual fund schemes.
(d) Perpetual Debt instruments
eligible for inclusion as Tier I capital and Debt capital instruments as
upper Tier II capital issued by banks in India to augment their capital
(Tier I capital and Tier II capital as defined by Reserve Bank) provided
that the investment by all eligible investors in Perpetual Debt instruments
(Tier I) shall not exceed an aggregate ceiling of 49 percent of each issue
and investment by a single FPI shall not exceed the limit of 10 percent of
each issue.
(e) Non-convertible debentures/
bonds issued by an Indian company.
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 investors.
ii.
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.
iii.
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.
(f) Non-convertible debentures/
bonds issued by Non-Banking Financial Companies categorized as
‘Infrastructure Finance Companies’(IFCs) by the Reserve Bank. This will
include such instruments issued on or after November 3, 2011 and held by
deemed FPIs.
(g) Rupee denominated bonds/
units issued by Infrastructure Debt Funds. This will include such
instruments issued on or after November 22, 2011 and held by deemed FPIs.
(h) Credit enhanced bonds.
(i) Listed non-convertible/
redeemable preference shares or debentures issued in terms of Regulation 9
of FEMA 20(R).
(j) Security Receipts (SRs)
issued by Asset Reconstruction Companies and securitization companies
subject to directions/ guidelines of the Reserve Bank [Department of
Non-Banking Regulations (DNBR)] and the following conditions:
i.
FPIs
can invest up to 100 per cent of each tranche in SRs issued by ARCs,
subject to provisions of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002.
ii.
The
restriction on investments with less than three years residual maturity is
not applicable to investment by FPIs in SRs issued by ARCs.
iii.
Such
investment should be within the FPI limits on corporate bonds prescribed by
the Reserve Bank.
iv.
Investment
by FPIs in the unlisted corporate debt securities and securitised debt
instruments shall not exceed investment limits prescribed for corporate
bonds from time to time.
(k) Securitised debt
instruments, including (i) any certificate or instrument issued by a
special purpose vehicle (SPV) set up for securitisation of asset/s with
banks, Financial Institutions or NBFCs as originators; and/ or (ii) any
certificate or instrument issued and listed in terms of the Securities and
Exchange Board of India (Regulations on Public Offer and Listing of
Securitised Debt Instruments), 2008.
(l) FPI can acquire NCDs/ bonds,
which are under default, either fully or partly, in the repayment of
principal on maturity or principal instalment in the case of amortising
bond. The revised maturity period of such NCDs/ bonds, restructured based
on negotiations with the issuing Indian company, should be three years or
more. The FPI should disclose to the Debenture Trustees the terms of the
offer made to the existing debenture holders/ beneficial owners from whom
the bonds are being acquired. Such investment should be within the overall
limit prescribed for corporate debt from time to time.
1.1.2 FPIs can offer the
following instruments as collateral to the recognized Stock Exchanges in
India for their transactions in exchange traded derivative contracts:
a.
domestic
Government Securities (acquired in accordance with the provisions of
Schedule 5 to FEMA 20(R) and subject to the overall limits specified by the
SEBI from time to time);
b.
foreign
sovereign securities with AAA rating;
c.
corporate
bonds acquired by FPIs in accordance with provisions of Schedule 5 to FEMA
20(R);
d.
cash
Note: Cross-margining of
Government Securities (placed as margins by the FPIs for their transactions
in the cash segment of the market) is not allowed between the cash and the
derivative segments of the market.
1.2 Permission to Non-resident
Indians (NRIs) or Overseas Citizens of India (OCIs) – Repatriation basis
1.2.1 A Non-resident Indian
(NRI) or an Overseas Citizen of India (OCI) can, without limit, purchase
the following instruments on repatriation basis:
a.
Government
dated securities (other than bearer securities) or treasury bills or units
of domestic mutual funds;
b.
Bonds
issued by a Public Sector Undertaking (PSU) in India;
c.
Shares
in Public Sector Enterprises being disinvested by the Central Government,
provided the purchase is in accordance with the terms and conditions
stipulated in the notice inviting bids;
d.
Bonds/
units issued by Infrastructure Debt Funds;
e.
Listed
non-convertible/ redeemable preference shares or debentures issued in terms
of Regulation 9 of these Regulations;
1.2.2 A NRI or an OCI can
purchase on repatriation basis perpetual debt instruments eligible for
inclusion as Tier I capital and Debt capital instruments as upper Tier II
capital issued by banks in India to augment their capital, as stipulated by
Reserve Bank.
1.2.3 The investments by all
NRIs or OCIs in Perpetual Debt Instruments (Tier I) should not exceed an
aggregate ceiling of 24 percent of each issue and investments by a single
NRI or OCI should not exceed 5 percent of each issue. Investment by NRIs or
OCIs in Debt Capital Instruments (Tier II) shall be accordance with the
extant policy for investment by NRIs or OCIs in other debt instruments.
1.2.4 A NRI may subscribe to
National Pension System governed and administered by Pension Fund
Regulatory and Development Authority (PFRDA), provided such person is
eligible to invest as per the provisions of the PFRDA Act, 2013. The
annuity/ accumulated saving will be repatriable.
1.2.5 NRIs/ OCIs can offer
instruments as may be specified by the Reserve Bank or SEBI as collateral
to the recognized Stock Exchanges in India for their transactions in
exchange traded derivative contracts,
1.3 Permission to Non-resident
Indians (NRIs) or Overseas Citizens of India (OCIs) – Non-Repatriation
basis
1.3.1 A NRI or an OCI can,
without limit, purchase on non-repatriation basis, dated Government
securities (other than bearer securities), treasury bills, units of
domestic mutual funds, units of Money Market Mutual Funds, or National
Plan/ Savings Certificates.
1.3.2 A NRI or an OCI can,
without limit, purchase on non-repatriation basis, listed non-convertible/
redeemable preference shares or debentures issued in terms of Regulation 9
of FEMA 20(R).
1.3.3 A NRI or an OCI can,
without limit, on non-repatriation basis subscribe to the chit funds
authorised by the Registrar of Chits or an officer authorised by the State
Government in this behalf.
1.4 Permission to Foreign
Central Banks or a Multilateral Development Bank for purchase of Government
Securities
1.4.1 A Foreign Central Bank can
purchase and sell dated Government securities/ treasury bills in the
secondary market subject to conditions as may be prescribed by the Reserve
Bank.
1.4.2 A Foreign Central Bank,
may purchase and sell dated Government securities/ treasury bills subject
to conditions as may be prescribed by the Reserve Bank.
1.4.3 A Multilateral Development
Bank which is specifically permitted by Government of India to float rupee
bonds in India can purchase Government dated securities subject to
conditions as may be prescribed by the Reserve Bank.
1.5 Permission to other
non-resident investors for purchase of securities
1.5.1 Long term investors like
Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds,
Insurance Funds, Pension Funds which are registered with Securities and
Exchange Board of India as eligible investors in Infrastructure Debt Funds
can purchase on repatriation basis Rupee Denominated bonds/ units issued by
Infrastructure Debt Funds.
1.5.2 Long term investors like
Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds,
Insurance Funds, Pension Funds and Foreign Central Banks registered with
Securities and Exchange Board of India can purchase, on repatriation basis
the following instruments and subject to limits prescribed by the Reserve
Bank and terms and conditions specified by SEBI and the Reserve Bank:
a.
Dated
Government securities/ treasury bills. With effect from July 23, 2014, long
term investors are not allowed to invest in treasury bills.
b.
Commercial
papers issued by an Indian company. With effect from February 03, 2015,
long term investors are not allowed to make any further investment in CPs.
c.
Units
of domestic mutual funds. Long term investors are not allowed to make any
further investment in CPs after February 03, 2015.
d.
perpetual
debt instruments eligible for inclusion as Tier I capital and debt capital
instruments as upper Tier II capital issued by banks in India to augment
their capital (Tier I capital and Tier II capital as defined by Reserve
Bank) provided that the investment by all eligible investors in Perpetual
Debt instruments (Tier I) shall not exceed an aggregate ceiling of 49
percent of each issue, and investment by a single long term investor shall
not exceed the limit of 10 percent of each issue.
e.
Listed
non-convertible debentures/ bonds issued by an Indian company.
f.
Listed
and unlisted non-convertible debentures/ bonds issued by an Indian company
in the infrastructure sector. The term ‘Infrastructure Sector’ has the same
meaning as given in the Harmonised Master List of Infrastructure
sub-sectors approved by Government of India vide Notification F. No.
13/06/2009-INF dated March 27, 2012 as amended/ updated.
g.
non-convertible
debentures/ bonds issued by Non-Banking Finance Companies categorized by
the Reserve Bank as ‘Infrastructure Finance Companies (IFCs)’.
h.
primary
issues of non-convertible debentures/ bonds provided such non-convertible
debentures/ bonds are committed to be listed within 15 days of such
investment. In the event of the instruments not being listed within 15 days
of issuance then the long term investor shall immediately dispose such
instruments by way of sale to a third party or to the issuer. The terms of
offer to the long term investors should contain a clause that the issuer of
such instruments shall immediately redeem/ buyback those securities from the
long term investors in such an eventuality;
i.
credit
enhanced bonds;
j.
listed
non-convertible/ redeemable preference shares or debentures issued in terms
of Regulation 9 FEMA 20(R);
k.
security
Receipts (SRs) issued by Asset Reconstruction Companies up to 100 percent
of each tranche, subject to directions/ guidelines of the Reserve Bank
[Department of Non-Banking Regulations (DNBR)]
l.
security
receipts (SRs) issued by securitization companies
1.5.3 The conditions prescribed
at 1.1.1 of this annex for investment made by FPIs shall mutatis mutandis
apply for investment made by long term investors under para 1.5.2 of this
annex.
2. Mode of Payment
2.1 The amount of consideration
for purchase of instruments by FPIs should be received from abroad through
banking channels or paid out of funds held in a foreign currency account
and/ or Special Non-Resident Rupee (SNRR) account maintained in accordance
with the Foreign Exchange Management (Deposit) Regulations, 2016. The
foreign currency account and SNRR account shall be used only and
exclusively for transactions under this Annex.
2.2 The amount of consideration
for purchase of instruments by NRIs or OCIs on repatriation basis should be
received from abroad through banking channels or paid out of funds held in
NRE/ FCNR(B) account maintained in accordance with the Foreign Exchange
Management (Deposit) Regulations, 2016.
2.3 The amount of consideration
for (a) purchase of instruments by NRIs or OCIs on non-repatriation basis
and (b) subscriptions to the National Pension System by NRIs should be
received from abroad through banking channels or paid out of funds held in
NRE/ FCNR(B)/ NRO account maintained in accordance with the Foreign
Exchange Management (Deposit) Regulations, 2016.
2.4 The amount of consideration
for purchase of Government dated securities by a Foreign Central Bank or a
Multilateral Development Bank should be received from abroad through
banking channels or paid out of funds held in an account opened with the
specific approval of the Reserve Bank.
2.5 The amount of consideration
for purchase of instruments by other non-resident investors should be
received from abroad through banking channels.
3. Permission for Sale of
instruments
3.1 A person resident outside
India who has purchased instruments in accordance with this annex can sell/
redeem the instruments.
4. Remittance/ credit of sale/
maturity proceeds
4.1 The sale/ maturity proceeds
(net of taxes) of instruments held by Foreign Portfolio Investors (FPIs)
can be remitted outside India or credited to the foreign currency account
or SNRR account of the FPI.
4.2 The sale/ maturity proceeds
(net of taxes) of instruments held by NRIs or OCIs, can be:
a.
Credited
to the NRO account of the person concerned where the instruments were held
on non-repatriation basis, or
b.
Credited
to the NRO account of the person concerned where the payment for the
purchase of the instruments sold was made out of funds held in NRO account,
or
c.
Remitted
abroad or at the NRI/ OCI investor's option, credited to his NRE/ FCNR(B)/
NRO account, where the instruments were purchased on repatriation basis.
4.3 In all other cases, the
sale/ maturity proceeds (net of taxes) can be remitted abroad or credited
to an account opened with the prior permission of the Reserve Bank.
5. Limits
5.1 The limits for the various
debt instruments will be specified through AP (Dir Series) Circulars.
Annex
6
Investment
in a Limited Liability Partnership (LLP)
1. Investment in an LLP
1.1 Foreign Investment was
permitted in an LLP with effect from May 20, 2011.
1.2 A person resident outside
India (other than a citizen of Pakistan or Bangladesh) or an entity
incorporated outside India (other than an entity incorporated in Pakistan
or Bangladesh), not being a Foreign Portfolio Investor (FPI) or a Foreign
Venture Capital Investor (FVCI), is permitted to contribute to the capital
of an LLP operating in sectors/ activities where foreign investment up to
100 percent is permitted under automatic route and there are no FDI linked
performance conditions.
1.3 Investment by way of ‘profit
share’ will fall under the category of reinvestment of earnings.
1.4 Investment in an LLP is
subject to the conditions prescribed in the Limited Liability Partnership
Act, 2008.
1.5 A company having foreign
investment, engaged in a sector where foreign investment up to 100 percent
is permitted under the automatic route and there are no FDI linked
performance conditions, can be converted into an LLP under the automatic
route.
1.6 An LLP having foreign
investment, engaged in a sector where foreign investment up to 100 percent
is permitted under the automatic route and there are no FDI linked
performance conditions, can be converted into a company under the automatic
route.
2. Mode of payment
2.1 Payment by an investor
towards capital contribution of an LLP should be made by way of an inward
remittance through banking channels or out of funds held in NRE or FCNR(B)
account maintained in accordance with the Foreign Exchange Management
(Deposit) Regulations, 2016.
3. Remittance of disinvestment
proceeds
3.1 The disinvestment proceeds
can be remitted outside India or may be credited to NRE or FCNR(B) account
of the person concerned.
Annex
7
Investment
by a Foreign Venture Capital Investor (FVCI)
1. Investment by Foreign Venture
Capital Investor (FVCI)
1.1 Investment by an FVCI was
permitted with effect from December 26, 2000
1.2 An FVCI is permitted to
invest in securities (not listed on a recognised stock exchange at the time
of issue), of an Indian company engaged in the following sectors:
1.
Biotechnology
2.
IT
related to hardware and software development
3.
Nanotechnology
4.
Seed
research and development
5.
Research
and development of new chemical entities in pharmaceutical sector
6.
Dairy
industry
7.
Poultry
industry
8.
Production
of bio-fuels
9.
Hotel-cum-convention
centres with seating capacity of more than three thousand.
10.
Infrastructure
sector. The term ‘Infrastructure Sector’ has the same meaning as given in
the Harmonised Master List of Infrastructure sub-sectors approved by
Government of India vide Notification F. No. 13/06/2009-INF dated March 27,
2012 as amended/ updated.
1.3 An FVCI can invest in
securities issued by a startup, irrespective of the sector in which the
startup is engaged.
1.4 An FVCI can acquire units of
a Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund
(Cat-I AIF) or units of a scheme or of a fund set up by a VCF or by a Cat-I
AIF.
1.5 Investment by an FVCI in
capital instruments of an Indian company will be subject to the reporting,
sectoral caps, entry routes and attendant conditions.
1.6 An FVCI may purchase the
securities/ instruments permitted for it either from the issuer of these
securities/ instruments or from any person holding these securities/
instruments.
1.7 An FVCI may invest in
securities on a recognized stock exchange subject to the provisions of the
Securities and Exchange Board of India (FVCI) Regulations, 2000.
1.8 An FVCI may acquire/
transfer securities/ instruments permitted for it at a price that is
mutually acceptable to the buyer and the seller/ issuer. In case of sale to
a person resident outside India, the buyer should be an eligible acquirer.
1.9 An FVCI may also receive the
proceeds of the liquidation of VCFs or of Cat-I AIFs or of schemes/ funds
set up by the VCFs or Cat-I AIFs.
2. Mode of payment
2.1 The amount of consideration
shall be paid as inward remittance from abroad through banking channels or
out of funds held in a foreign currency account and/ or a Special
Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign
Exchange Management (Deposit) Regulations, 2016.
2.2 The foreign currency account
and SNRR account shall be used only and exclusively for transactions under
this annex.
3. Remittance of sale/ maturity
proceeds
3.1 The sale/ maturity proceeds
(net of taxes) may be remitted outside India or may be credited to the
foreign currency account or SNRR account of the FVCI.
Annex
8
Investment
by a person resident outside India in an Investment Vehicle
1. Investment in units of an
Investment Vehicle
1.1 A person resident outside
India (other than a citizen of Pakistan or Bangladesh) or an entity
incorporated outside India (other than an entity incorporated in Pakistan
or Bangladesh) is permitted, with effect from November 13, 2016, to invest
in units of Investment Vehicles.
1.2 The sale/ transfer/
redemption of units acquired/ purchased in accordance with this annex are
subject to the regulations framed by Securities and Exchange Board of India
or the directions issued by the Reserve Bank.
1.3 An Investment vehicle can
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.
1.4 The portfolio investment by
an AIF (Cat III) which has foreign investment is restricted to the
securities/ instruments permitted for FPIs under FEMA 20(R).
2. Mode of payment
2.1 The amount of consideration
should be paid as inward remittance from abroad through banking channels or
by way of swap of shares of a Special Purpose Vehicle or out of funds held
in NRE or FCNR(B) account maintained in accordance with the Foreign
Exchange Management (Deposit) Regulations, 2016.
3. Remittance of sale/ maturity
proceeds
3.1 The sale/ maturity proceeds
(net of taxes) of the units may be remitted outside India or credited to
the NRE or FCNR(B) account of the person concerned.
Annex
9
Investment
in Depository receipts by a person resident outside India
1. Issue/ transfer of eligible
instruments to a foreign depository for the purpose of issuance of
depository receipts by eligible person(s)
1.1 In terms of Depository
Receipts Scheme, 2014 (DR Scheme, 2014), Depository Receipts can be issued
against any security or unit in which a person resident outside India is
allowed to invest under FEMA 20(R). These will be referred to as ‘eligible
instruments’ for the purpose of this annex.
1.2 A person is permitted to
issue or transfer eligible instruments to a foreign depository for the
purpose of issuance of depository receipts in accordance with the DR
Scheme, 2014 and guidelines issued by Central Government in this regard.
1.3 A domestic custodian can
purchase eligible instruments on behalf of a person resident outside India,
for the purpose of converting the instruments so purchased into depository
receipts in terms of DR Scheme 2014.
1.4 The aggregate of eligible
instruments which may be issued or transferred to foreign depositories,
along with eligible instruments already held by persons resident outside
India, shall not exceed the limit on foreign holding of such eligible
instruments under the Act, rules or regulations framed thereunder.
1.5 The eligible instruments
shall not be issued or transferred to a foreign depository for the purpose
of issuing depository receipts at a price less than the price applicable to
a corresponding mode of issue or transfer of such instruments to domestic
investors under the applicable laws.
2. Saving
2.1 Depository Receipts issued
under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993 shall be deemed to have
been issued under the corresponding provisions of DR Scheme 2014 and have to
comply with the provisions laid out in this annex.
Annex
10
Issue
of Indian Depository Receipts (IDRs)
1. Issue of IDRs
1.1 Companies incorporated
outside India may issue IDRs through a Domestic Depository, to a person
resident in India and a person resident outside India.
1.2 The issue of IDRs should
comply with the Companies (Registration of Foreign Companies) Rules, 2014
and the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009;
1.3 Any issue of IDRs by
financial/ banking companies having presence in India, either through a
branch or subsidiary, shall require prior approval of the sectoral
regulator(s);
1.4 IDRs shall be denominated in
Indian Rupees only;
1.5 The proceeds of the issue of
IDRs shall be immediately repatriated outside India by the companies
issuing such IDRs.
2. Purchase/ sale of IDRs:
2.1 An FPI or an NRI or an OCI
may purchase, hold or sell IDRs
2.2 NRIs or OCIs may invest in
the IDRs out of funds held in their NRE/ FCNR(B) account, maintained in
accordance with the Foreign Exchange Management (Deposit) Regulations,
2016.
2.3 There would be an overall
cap of USD 5 billion for raising of capital by issuance of IDRs by eligible
foreign companies in Indian markets. This limit would be monitored by SEBI
3. Transfer, redemption and two
way fungibility of IDRs
3.1 Redemption/ conversion of
IDRs into underlying equity shares of the issuing company shall comply with
the Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004.
3.2 IDRs shall not be redeemable
into underlying equity shares before the expiry of one year from the date
of issue.
3.3 Limited two way fungibility
of IDRs is permissible.
3.4 The guidelines to be
followed for 3.1, 3.2 and 3.3 above are as follows:
a.
Listed
Indian companies may either sell or continue to hold the underlying shares
subject to compliance with the Foreign Exchange Management (Transfer or
Issue of any Foreign Security) Regulations, 2004.
b.
Indian
Mutual Funds, registered with SEBI may either sell or continue to hold the
underlying shares subject to compliance with the Foreign Exchange
Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
c.
Other
persons resident in India including resident individuals are allowed to
hold the underlying shares only for the purpose of sale within a period of
30 days from the date of conversion of the IDRs into underlying shares.
3.5 The FEMA provisions shall
not apply to the holding of the underlying shares, on redemption of IDRs by
the FPIs.
APPENDIX
List
of notifications/ circulars which have been consolidated in this Master Direction
Sl
No
|
Notification/
AP (DIR Series) Circular
|
Date
|
1
|
Notification No. FEMA 20
(R)/2017-RB
|
November 7, 2017
|
2
|
AP (DIR) Series Circular No.
14
|
September 16, 2003
|
|