By Rupin Chopra and Vikram Narula
The Central Government has introduced Foreign Exchange Management (Non-debt Instruments) Rules, (hereinafter referred to as ‘NDI Rules’) on October 17, 2019. These Rules clearly define distinctive powers of the Reserve bank of India (hereinafter referred to as ‘RBI’), and Central Government with respect to transactions under Foreign Exchange Management Rules, 1999 (hereinafter referred to as ‘FEMA’).
Understanding the role of RBI and Central Government –
Section 47 of FEMA, authorizes RBI to set limits and frame regulations with respect to debt instruments and Section 46 of FEMA, authorizes the Central Government similar powers with respect to non-debt instruments.
- The NDI rules defines debt and non-debt instruments. Debt instruments have been defined as all instruments which are not non-debt instruments. Non-debt instruments have been defined as the following:
- all investments in equity instruments in incorporated entities: public, private, listed and unlisted;
- capital participation in LLP;
- all instruments of investment recognized in the FDI policy notified from time to time;
- investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts);
- investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per cent in equity;
- junior-most layer (i.e. equity tranche) of securitization structure;
- acquisition, sale or dealing directly in immovable property;
- contribution to trusts; and
- depository receipts issued against equity instruments
- By the virtue of NDI Rules, the term ‘Capital Instruments’ has been deleted and has been replace with ‘equity instruments’ The new definition of ‘equity instruments’ now includes convertible debentures.
- The definition of ‘investment vehicle’ has been changed to include mutual funds investing more than 50% in equity instruments, fall under the purview of Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’).
- With respect to the sale or purchase of equity instruments of an Indian company by a non-resident, RBI shall specify the mode of payment, attendant conditions and reporting requirements.
- In case of scheme of merger or amalgamation of two or more companies or reconstruction by way of demerger or otherwise of an Indian company, where such companies are listed on recognized stock exchange in India, it should be in accordance with the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirement) Regulations, 2015.
- Foreign Venture Capital Institutions (FVCI) have now been permitted to invest in equity, equity linked instruments or debt-instruments of Indian start-ups.
- Non-resident Indians or Overseas citizens of India can purchase or sell units of domestic mutual funds which invest more than 50% in equity both on repatriation and non-repatriation basis, without any limit.
- The definition of an ‘e-commerce entity’ under NDI Rules has been modified to exclude a foreign company covered under section 2 (42) of the Companies Act, 2013 or an office, branch or agency in India as provided in Section 2 (v) (iii) of FEMA, 1999, which is owned or controlled by a person who is a non-resident and conducts business outside India. To this effect, only a company incorporated under the Companies Act 1956/2013 can undertake e-commerce business activities.
- Single Brand Retail Trading – NDI now provides for sectoral cap and performance linked conditions.
Investment by Foreign Portfolio Investors (hereinafter referred to as ‘FPI’)
- Investment limits of FPI have been modified to include sectoral caps applicable to Indian economy as set out in the NDI Rules.
- The aggregate limit for FPIs can be increased or decreased by the Indian company in accordance with the approval of its Board members. Once the limits have been increased, they cannot be reduced to a lower threshold.
- The aggregate limit for an Indian company in a sector where FDI is prohibited will be 24%.
- FPIs scope for investment in foreign funds have been widened.
The classification of debt and non-debt instruments have now been clearly specified which throws light on rules of investment in different modes. The changes introduced are investor friendly and it can be expected that these will ensure investment efficiency for foreign transactions.