RBI Compliance
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RBI Compliance - Overview
In our article on FEMA compliances for FDI, we gained a detailed understanding of Foreign Direct Investment compliances, including the two routes available for attracting FDI. Additionally, we discussed sectors falling under the automatic and approval routes. Moving forward, here is an extensive discussion on the various RBI compliance requirements concerning FDI. Before delving into the relevant regulations, let’s briefly define FDI and RBI-FDI compliance.
What is FDI? Foreign Direct Investment (FDI) refers to investments in an Indian entity by a non-resident investor, which has proven to be a pivotal method for raising capital among Indian businesses. Typically, these investments are made in exchange for equity interest in the investee entity.
What is RBI-FDI Compliance? FDI transactions in India are governed by detailed provisions and regulations set forth by the Reserve Bank of India (RBI). The RBI’s Master Circular No. 15/2015-16 outlines these provisions, followed by the FED Master Direction No. 11/2017-18, providing further directions on foreign investments in India. Let’s delve into the RBI compliances and regulations related to FDI.
Key FDI Regulations by RBI The following are critical regulations stipulated by RBI through its Master Circulars and Master Directions concerning FDI compliances:
Entry Routes
- Automatic Route: No prior approval from the Government or RBI is required.
- Approval Route: Prior approval from the Government, Department of Industrial Policy & Promotion, Department of Economic Affairs, or Ministry of Finance is mandatory for Indian companies or foreign investors.
Eligibility of Investors
- Any person or entity resident outside India can invest in FDI.
- Citizens or entities from Pakistan or Bangladesh require approval from the Foreign Investment Promotion Board (FIPB) under specific conditions outlined in FDI policies and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
- Non-Resident Indians, residents, and citizens of Bhutan and Nepal can invest in Indian companies’ convertible debentures and shares on a repatriation basis through normal banking channels or by debiting NRE/FCNR (B) accounts.
Types of Instruments Issuable
- Equity Shares
- Fully and mandatorily convertible preference shares
- Fully and mandatorily convertible debentures
- Warrants
These instruments must adhere to valuation norms, pricing guidelines, and reporting requirements outlined in FEMA guidelines.
Lock-in Period
- The lock-in period is determined based on the higher of one year or as prescribed by FDI regulations.
Exit Price
- For investments in listed companies, the exit price is based on prevailing market prices.
- For investments in unlisted companies, the exit price is determined using internationally accepted pricing methodologies, certified by a SEBI registered Merchant Banker or Chartered Accountant. There is no fixed or assured exit price; investors exit at prevailing fair prices.
Mode of Payment
- Payments for shares or convertible debentures must be made through:
- Inward remittance via banking channels
- Debit to FCNR/NRE accounts with AD Category-I banks
- Other approved methods as per RBI guidelines
Time Limit for Issuance of Securities
- Shares or debentures must be issued within 180 days of receipt of consideration. Extensions beyond 180 days require RBI approval with sufficient justification.
Modes of Investments
- Fresh issue of shares
- Transfer of existing shares, including inter alia transfers requiring government approval
- Acquisition of shares on recognized stock exchanges under FDI schemes
- Bonus shares/right shares issuance
- ESOPs issuance
- Conversion of fees/ECBs/royalties into equity
- Issuance of eligible securities under Depository Receipts Scheme, 2014
Acquisition of Shares through Merger and Acquisition
- Transferee companies in mergers or acquisitions involving Indian entities can issue shares to non-resident shareholders, provided the sectoral cap and FDI prohibited activities are not breached.
FDI in Limited Liability Partnerships
- Limited Liability Partnerships registered under the LLP Act, 2008 can accept FDI under the approval route, subject to conditions detailed in Annex-B.
FAQs
A convertible note is an instrument issued by startup companies during fundraising. It represents debt that can be repaid at the holder’s discretion or converted into a specified number of equity shares in the startup within five years from the issue date of the convertible notes, upon the occurrence of specified events and subject to agreed terms and conditions between the parties.
The distinctions among foreign investments, foreign portfolio investments, and foreign direct investments are as follows:
Foreign Investments: This refers to investments by a person residing outside India in the capital of an LLP or capital instruments of an Indian company on a repatriable basis.
Foreign Portfolio Investments: It involves investments by a person residing outside India where:
- The holding is less than 10% of the post-issue paid-up equity capital of a listed Indian company on a fully diluted basis, or
- Less than 10% of the paid-up value for each series of capital instruments of the listed Indian company.
Foreign Direct Investments: This pertains to investments by a person residing outside India in capital instruments:
- In an Indian unlisted company, or
- Amounting to 10% or more of the post-issue paid-up equity capital of a listed Indian company on a fully diluted basis.
These are specific conditions tied to sectors that must be fulfilled by companies receiving foreign investments. These conditions are outlined in Regulation 16 of FEMA 20(R).
The transfer of shares by way of sale of capital instruments must be reported using Form FC-TRS. This report must be filed within 60 days of remittance/receipt of funds or transfer of instruments, whichever occurs earlier, with the AD bank by either the resident person or the person residing outside India, as applicable.
A person residing outside India, other than NRIs/PIOs, may invest in a proprietorship concern, partnership firm, or any AOP in India after obtaining prior approval from RBI. However, NRIs or OCIs are allowed to invest in proprietorship and partnership concerns (excluding agricultural/plantation activities, print media, or real estate businesses) on a non-repatriation basis in India. As for incorporating a One Person Company (OPC), as per the amendment effective from April 1, 2021, a non-resident individual can now incorporate an OPC in India.
