RBI implements new foreign exchange regulations

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The Reserve Bank of India (RBI) on 7 November issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (TISPRO Regulations). The new TISPRO regulations supersede the TISPRO regulations, 2000, which were in place for the last 17 years.

The new TISPRO regulations streamline the foreign direct investment regime in India and bring it in line with the Consolidated Foreign Direct Investment Policy of 2017. The following are the highlights:

Capital instruments. The definition of the term “capital instruments” covers equity shares, fully, compulsorily and mandatorily convertible debentures, preference shares and share warrants. It has been clarified under the new TISPRO regulations that partly paid shares or share warrants may be issued upon 25% upfront payment of the consideration and the balance is to be paid within 12-18 months from the date of such issue.

Foreign direct investment (FDI). FDI has been defined as an investment through capital instruments by a person resident outside India in an unlisted Indian company, and in case of a listed Indian company 10% or more of the post issue paid up equity capital on a fully diluted basis in a listed Indian company. The latter insertion is a new change in the new TISPRO regulations.

The new TISPRO regulations contains a provision from the FDI policy stating that any person resident outside India may purchase capital instruments in a listed Indian company on a stock exchange, provided that such person has already acquired and continues to hold ”control” of the company in accordance with the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 2011. According to this, one has acquired control if he holds 25% or more of the shares of the listed company, or has the right to appoint a majority of directors, or the right to control the management and policy decisions of the company. Such an acquisition as per the FDI policy is to be done through a registered broker, but the new TISPRO regulations are silent on this.

Foreign portfolio investment (FPI). FPI has been defined as any investment made by a person resident outside India through capital instruments, where such investment is less than 10% of the post issue paid up share capital on a fully diluted basis of a listed Indian company, or less than 10% of the paid-up value of each series of capital instruments of a listed Indian company. This includes investments made by an entity registered with SEBI as a foreign portfolio investor under the SEBI (Foreign Portfolio Investors) Regulations, 2014.

If the total holding of an investor in an FPI investment increases to 10% or more of the total paid up equity capital on a fully diluted basis, or 10% or more of the paid up value of each series of capital instruments of a listed Indian company, then the total investment made by the investor shall be reclassified as FDI, subject to conditions specified by SEBI and the RBI. The investee company and the investor should comply with the reporting requirements under the new TISPRO regulations.

Merger/demerger/amalgamation of Indian companies. Under the new TISPRO regulations, if a scheme of merger, demerger or amalgamation has been approved by the National Company Law Tribunal or any other competent authority, the transferee company may issue capital instruments to existing holders of the transferor company resident outside India, as long as (1) the transfer is in compliance with the sectoral caps, routes, investment limits, and other conditions of investment by a person resident outside India, and (2) the reporting is made to the RBI under the new TISPRO regulations within 30 days of receipt of approval, giving full details of the shareholding of the non-resident investor before and after the restructuring.

Liberalization of NRI/OCI investments regime. The new TISPRO regulations have relaxed the rules for non-resident Indians (NRIs)/Overseas Citizen of India cardholders (OCIs) to be able to transfer the capital instruments to any person resident outside India by way of sale or gift, provided that the investment made is on a repatriation basis.

NRIs/OCIs who invest may transfer capital instruments to a person resident outside India by way of sale without any approval. But the transfer of capital instruments by way of gift would require prior approval from the RBI and be subject to several conditions, including the size of gift should not exceed 5% of the paid-up capital of the Indian company.

Reporting requirements. All reporting requirements under the old TISPRO regulations have been consolidated in regulation 13 of the new TISPRO regulations. The requirements remain broadly the same for various routes of investment, except for the reporting for transfer of shares in Form FC-TRS.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.