RBI Compliance

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RBI Compliance

In our article on FEMA compliances for FDI, we obtained a detailed understanding of Foreign Direct Investment compliances, what it meant, and the two routes available for attracting FDI. Apart from that, sectors falling under the automatic and approval route were discussed as well. Leaping further, here is a detailed discussion of the various RBI compliance requirements with respect to the FDI. However, let's take a quick look at the meaning of FDI and RBI-FDI compliance before discussing the relevant regulations.

What is FDI?
Foreign Direct Investments is the investment in an Indian entity by an investor resident outside India. This has been one of the most effective ways to raise capital among Indian businesses. The investments are usually made against the issue of equity interest in the investee.
What is RBI-FDI Compliance?
Foreign Direct Investments are regulated by detailed provisions and regulations as prescribed by the Reserve Bank of India. RBI through its Master Circular No. 15/2015-16 prescribed detailed provisions to regulate the FDI transactions in India. This was followed by the FED Master Direction No. 11/2017-18 further providing directions with respect to the foreign investments in India. Let's have a detailed look at RBI compliances and regulations in regard to the FDI.
Important FDI Regulations Prescribed by RBI
Following are the important regulations prescribed by RBI vide its Master Circular and Master Directions with respect to the FDI compliances:

Entry Routes

  • Automatic Route: No prior approval of the Government or RBI is required.
  • Approval Route: The Indian company or the foreign investor shall take prior approval of the Government, Department of Industrial Policy & Promotion, Department of Economic Affairs, or Ministry of Finance, as the case may be.

Eligibility of Investors

Any person or an entity resident outside India or incorporated outside India.A citizen or any entity incorporated in Pakistan or Bangladesh can invest through FDI only with the prior approval of FIPB and subject to such terms and conditions as mentioned in the FDI policies and Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000.
Non-Resident Indians, residents, as well as citizens of Bhutan and Nepal, can invest in convertible debentures and shares of Indian companies on a repatriation basis. However, the investment shall be made only through normal banking channels or by debit to the NRE/ FCNR (B) by way of inward remittance of free foreign exchange.

Type of Instruments that can be issued

  • Equity Shares
  • Fully and mandatorily convertible preference shares
  • Fully and Mandatorily Convertible Debentures
  • Warrants

These instruments shall be issued subject to the valuation norms, pricing guidelines as well as reporting requirements as per the FEMA guidelines.

Lock- in Period

The lock-in period shall be higher of:

  • One year or,
  • As prescribed by the FDI regulations

Exit Price

  • For investment in listed companies, the exit price shall be the market price prevailing in the recognized stock exchange.
  • For investment in unlisted companies, the exit price shall be the arms-length price as per the internationally accepted pricing methodology, duly certified by a SEBI registered Merchant Banker or a Chartered Accountant.

There shall not be any fixed or assured exit price and the non-resident investor shall exit at the fair price prevailing.

Mode of Payment

Against the issue of shares or convertible debentures, the Indian company shall receive payment in any of the following modes:

  • Inward remittance through banking channels.
  • Debit to FCNR/NRE account maintained with AD Category-I bank of the person concerned.
  • Conversion of lumpsum / royalty / technical know-how fees due for payment
  • Import by SEZ units of capital Goods
  • Conversion of ECB
  • Conversion of pre-incorporation expenses / import payables / share swaps with prior approval of FIPB
  • Debit in INR to non-interest bearing Escrow account in India, opened with AD Category - I bank approval and is maintained with the AD Category I bank on behalf of residents and non-residents.

The time limit for Issue of Securities

The shares or convertible debentures shall be issued within 180 days of receipt failing which the consideration received shall be refunded. However, the RBI may allow allotment of securities after 180 days after furnishing sufficient reasons on an application.

Mode of Investments

Following are the modes of investments under the Foreign Direct Investment scheme:

  • issue of Fresh shares
  • Transfer of existing shares. This includes:
  • Transfer of shares by any person resident outside India
  • Transfer of shares or convertible debentures from a resident person to a person resident outside India
  • Transfer of shares by Resident to non-resident requiring government approval
  • Acquisition or transfer of securities in certain cases requiring prior permission of the RBI
  • Escrow Account opened & maintained by AD Category-I banks as well as Depository Participant authorized by SEBI for transfer of shares
  • Acquisition of shares on a recognized stock exchange by a non-resident under FDI scheme
  • Issue of Bonus Shares / Right Shares.
  • Issue of shares through ESOPs (Employee Stock Option Scheme).
  • Conversion of Lumpsum fees / ECB / Royalty or import by an SEZ unit of capital goods into Equity / Pre-incorporation expenses / imports payable.
  • Issuing eligible securities under Depository Receipts Scheme 2014.
  • Transfer or issue of 'participating right or interest' in oil fields to a non-resident
  • Further, as per the master directions of RBI, any person resident outside India (except citizen or any entity incorporated in Pakistan or Bangladesh) can also invest in convertible notes of Rs. 25 lakhs or more in a single tranche as issued by an Indian Startup Company.

Acquisition of shares through Merger and Acquisition

In case of a merger or acquisition between two or more Indian Companies, the transferee company can issue its shares to the transferor company’s shareholders resident outside India subject to the condition that the percentage of shareholding by non-residents does not exceed the sectoral cap and the transferor or transferee or new company is not engaged in the activities prohibited for FDI purposes.

FDI in Limited Liability Partnerships

Subject to the conditions as provided in Annex-B, Limited Liability Partnerships that are registered under the Limited Liability Partnership Act, 2008 are eligible to accept FDI through the approval route.

FAQs about Bookkeeping & Accounting

Convertible notes are instruments issued by startup companies at the time of raising funds. They evidence receipt of money in the form of debt which can either be repaid, at the option of its holder or converted into a specified number of equity shares in the startup company within a period of 5 years from the date of issue of convertible notes on the occurrence of specified events and such other terms and conditions as may be agreed between the parties.

Following is the difference between foreign investments, foreign portfolio investments, and foreign direct investments: Foreign Investments: It means any investments by a person resident outside India in the capital of an LLP or capital instruments of an Indian Company on a repatriable basis. Foreign Portfolio Investments: It is an investment in capital instruments by a person resident outside India where it is: • Less than 10% of the post issue paid-up equity capital of a listed Indian company on fully diluted basis or, • Less than 10% of the listed Indian company's paid-up value for each series of capital instruments. Foreign Direct Investments: It is an investment by a person resident outside India in capital instruments • In an Indian unlisted company or, • 10% or more of the post issue paid-up equity capital of the listed Indian company on fully diluted basis

These are the sector-specific conditions that shall be fulfilled by the companies receiving foreign investments. The conditions are stipulated in Regulation 16 of FEMA 20(R).

Form FC-TRS shall be filed in case of transfer by way of sale of capital instruments. The reporting shall be done by either the resident person or a person resident outside India as the case may be by filing the Form FC-TRS within 60 days of remittance/receipt of funds or transfer of instrument, whichever is earlier with the AD bank.

Person resident outside India other than NRIs / PIO may after seeking prior approval of RBI make investment in proprietorship concern, partnership firm or any AOP in India. However, an NRI or OCI is permitted to invest in proprietorship and partnership concerns (not being engaged in any agricultural/ plantation activity or print media or real estate business) on a non-repatriation basis in India. With respect to incorporating a One Person Company, after the amendment w.e.f. 1st April 2021, a person not resident in India can incorporate an OPC. In A Nutshell RBI and FEMA through various regulations and compliance requirements have been monitoring the FDI transactions. Foreign investments are crucial to the economic development and prosperity of the country. However, regulating it is equally important in a bid to protect the domestic industries while at the same time maintaining a conducive environment for the foreign investors to invest in the Indian economy and the businesses.

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