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  • Geetanjali R Kamat, Dibya Prakash Behera

A New Face of the Indian Foreign Investment Regime

[Geetanjali R Kamat is the Founder-Editor at IRCCL, while Dibya Prakash Behera is the Manager and Editor of the blog.]

Recently, the Ministry of Finance and the Reserve Bank of India (the RBI) notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (the Non-debt Instruments Rules) and the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (the Debt Instruments Regulations), respectively. Whilst the Non-debt Instruments Rules superseded the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (the Erstwhile TISPRO Regulations) as well as the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (the Erstwhile ATIP Regulations), the Debt Instruments Regulations only superseded the Erstwhile TISPRO Regulations.

The primary intent behind the notification of the Non-debt Instruments Rules and the Debt Instruments Regulations was to give effect to the amendments proposed in the Finance Act, 2015. Notably, under the extant regulations, the Reserve Bank of India (RBI) was only empowered to specify classes of permissible capital account transactions. However, the Finance Act, 2015, streamlining the power division between the RBI and the Central Government, gave the RBI the right to specify classes of capital account transactions, involving debt instruments and a similar power to the Central Government, in respect of non-debt instruments. It also mandated that the debt instruments should be defined by the Central Government in consultation with the RBI. The primary motive behind such a move was to enable the Central Government to exercise greater control on capital flows such as equity.

It is imperative to note that the amendment resonated with the Financial Sector Regulatory Reform Report, 2013 (the Report) to some extent. The Report remarkably acknowledged that there is an absence of a clear and consistent framework of policy and translation of policy into law with respect to regulation of foreign exchange. In a bid to overcome such incongruities, it recommended that the Central Government frame rules governing inward flows (Foreign Direct Investment) and consequent outflows i.e. repayment of the principal amount, and the RBI frame rules regulating capital controls on outward flows (Overseas Direct Investments). Interestingly, the Finance Act, 2015 went a step further and provided rule making power to the Central Government with regard to both inward and outward capital flows, leaving the RBI with minimal powers in respect of regulation of foreign exchange. Although the new rules have not drastically overhauled the foreign investment regime, there are a few key takeaways which have been summarized as below:

The subtle supersession

The Debt Instruments Regulations supersedes the Erstwhile TISPRO Regulations by creating a separate regime for foreign exchange involving debt instruments, governing activities such as the purchase and sale of debt instruments by a person resident outside India, the mode of payment and the remittance of sale and / or maturity proceeds. On the other hand, the Non-debt Instruments Rules has been issued in supersession of the Erstwhile TISPRO Regulations and the Erstwhile ATIP Regulations 'except as things done or omitted to be done before such supersession', which implies that – (a) Chapter IX of the Non-debt Instruments Rules, which provides for the acquisition and transfer of immovable property in India, effectively substitutes the Erstwhile ATIP Regulations; and (b) the Non-debt Instruments Rules and the Debt Instruments Regulations come into force 'from the date of their publication in the Official Gazette', i.e., with effect from 17 October 2019.

Capital instruments vis-à-vis debt and non-debt instruments

The Erstwhile TISPRO Regulations did not include separate definitions for debt and non-debt / equity instruments; it only defined the term ‘capital instruments.’ More specifically, it defined capital instruments to mean equity shares, debentures, preference shares and share warrants, wherein non-convertible / optionally convertible / partially convertible preference shares were categorically treated as debt. However, the Non-debt Instruments Rules, having completely done away with the definition of the term capital instruments, provides an exhaustive definition of the term ‘non-debt instruments.’ In this regard, it is also important to read the Non-debt Instruments Rules together with Schedule I of the Debt Instruments Regulations and the notification issued by the Ministry of Finance on 16 October 2019, which sets out a list of debt and non-debt instruments, as mentioned below in Table A.

Foreign portfolio investment

With effect from 1 April 2020, the aggregate limit for investment by foreign portfolio investors (FPIs) will be the applicable sectoral caps. However, if it is a sector wherein foreign direct investment itself is prohibited, the threshold for such investment by FPIs will be 24%. The aggregate limit may be (a) decreased to a lower threshold of 24% or 49% or 74%, prior to 31 March 2020; or (b) increased, with the prior approval of the board of directors and shareholders by way of a special resolution. However, once the investment limits are increased, they cannot be decreased.

Enhanced role of the Central Government

The Erstwhile TISPRO Regulations, in a handful of its provisions, required the RBI to consult with the Central Government in taking certain decisions. A few of these provisions were in relation to (a) permitting persons resident outside India to purchase or sell securities other than capital instruments in accordance with Schedule 5 of the Erstwhile TISPRO Regulations; and (b) payment of late submission fees for any delays in duly complying with the reporting requirements. However, the Non-debt Instruments Rules seems to have taken this one step further by inserting the words 'and in consultation with the Central Government' in various other provisions as well, such as in respect of 'transfer of equity instruments taking place by way of sale in accordance with the pricing guidelines, documentation and reporting requirements, as specified by the RBI, in consultation with the Central Government.'

Mode of payment and reporting requirements

Under the Non-debt Instruments Rules, a separate framework governing mode of payment and reporting requirements has been issued in the form of the Foreign Exchange Management (Mode of Payment and Reporting of Non-debt Instruments) Regulations, 2019 (the Mode of Payment and Reporting Requirements Regulations). While the reporting requirements in these regulations substitute regulation 13 of the Erstwhile TISPRO Regulations, the mode of payment and remittance of sale and / or maturity proceeds appears to have been streamlined in the Mode of Payment and Reporting Requirements Regulations.

FDI sectoral caps

The thresholds for foreign investment in respect of various sectors have been provided in Schedule 1 of the Non-debt Instruments Rules, which appears to have replaced the sectoral caps specified in Regulation 16 of the Erstwhile TISPRO Regulations. However, Schedule 1 fails to consolidate several changes which have been introduced in relation to foreign investment in certain sectors – for instance, the changes introduced by Press Note Number 4, issued by the Department for Promotion of Industry and Internal Trade, are not reflected in the Non-debt Instruments Rules. Accordingly, it is advisable to refer to the updated and most recent version of the consolidated FDI policy read with the relevant press notes, for accurate information in this regard.


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