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New Foreign Investment Regulations
By SKP Business Consulting

The Reserve Bank of India (RBI), vide Notification No. FEMA 20(R)/ 2017-RB, dated 7 November 2017 issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (the NewRegulations). The New Regulations have superseded the erstwhile Notification No. FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB, both dated 3 May 2000 (the Old Regulations). The New Regulations have come into force on the date of its publication in the Official Gazette on 8 November 2017.
Since the Old Regulations were issued in 2000, the RBI had notified various amendments till date. Now, the New Regulations consolidates all the amendments at once place and also incorporates certain new concepts with respect to the issue or transfer of securities of an Indian company by a person resident outside India.

Key highlights of the New Regulations:


Changes introduced by the New Regulations

Definition of Capital Instruments

The New Regulations have replaced the definition of ‘Capital’ with ‘Capital Instruments’. Although the base definition does not change much, the new definition of Capital Instruments expressly provides for the following:

  • Warrants can be issued to a person resident outside India only in accordance with the regulations issued by the Securities Exchange Board of India (SEBI);

  • 25% of the total consideration shall be received upfront in the case of both partly-paid shares and warrants. The balance amount shall be received within 12 months and 18 months respectively.

Definition of Foreign Direct Investment (FDI)

The definition of FDI under the New Regulations differentiates between investment in an Indian listed company and unlisted company while recognising the calculation of limits on a fully diluted basis. Any investment in a Capital Instrument of an unlisted company on a fully diluted basis shall be treated as FDI. However, an investment in a Capital Instrument of a listed company below 10% of the total paid-up capital on a fully diluted basis will be considered Foreign Portfolio Investment (FPI).

Definition of Foreign Investment

Foreign investment has been defined to mean any investment made by a person resident outside India on a repatriable basis, thus clarifying that investment on a non-repatriation basis will be at par with domestic investment.

Foreign Portfolio Investment (FPI)

The definition of FPI is aligned with the SEBI regulations on FPI. Accordingly, any investment by a Foreign Portfolio Investor or Investor Group in a listed Indian company that is less than 10% of the paid-up share capital (post issue) or less than 10% of the paid-up value of each series of Capital Instruments shall be regarded as FPI. Any such investment above 10% shall be regarded as FDI.

Issue of shares under merger, demerger or amalgamation

The New Regulations have aligned the concept of issue of shares with the requirements under the Companies Act, 2013. Accordingly, general permission is available for issuance of shares in a scheme of merger, demerger or amalgamation pursuant to the orders of the National Company Law Tribunal (NCLT) or other competent authority subject to the entry routes, sectoral caps or investment limits.

Valuation of shares

Practicing Chartered Accountants are also authorised to do valuation of shares under the New Regulations.

Issue of Capital Instruments

The time limit for issuance of Capital Instruments has been aligned with the Companies Act, 2013. Therefore, Capital Instrument will have to be issued within 60 days of the receipt of considerations as compared to 180 days earlier.

Transfer of shares

Although the essence of transfer of shares is retained in the New Regulations as per Old one, it is pertinent to note that the general permission also granted for the transfer of shares to a non-resident pursuant to liquidation, merger, de-merger, amalgamation of foreign companies.

Reporting transfer

The New Regulations retains that the onus of reporting transfers shall be on the resident transferor/transferee or the person resident outside India holding Capital Instruments on a non-repatriable basis, as the case may be.

Delayed reporting of FDI can be made with payment of late submission fee

The Old Regulations required compounding in the case of filing documents beyond the designated time. However, the New Regulations allows delayed reporting subject to payment of late submission fees.

Downstream investments

  • It is provided that downstream investment should have the approval of the Board of Directors as also Shareholder’s Agreement, if any;

  • The definition of downstream investment shall include investment by an Indian company or Limited Liability Partner (LLP) or investment vehicle in another downstream Indian company or LLP

Author Comments: 

The New Regulations, in supersession of the Old Regulations, has been neatly presented and gives readers a consolidated view of the transfer or issue of securities by a person resident outside India. The New Regulations clarifies several aspects of FDI and aims towards further simplification. The FDI limit is to be calculated on a fully diluted basis. Also, the differentiation between FDI and FPI offers greater clarity. The New Regulations seek to align concepts contemporary to the Companies Act and the SEBI regulations.


Delayed reporting with penalty helps avoid the rigours of going for compounding and saves a lot of time and administrative costs. However, the New Regulations should have used this opportunity to clarify remittance on account of a capital reduction scheme or buy-back of shares expressly in line with the Consolidated FDI Policy issued by DIPP. Similarly, an express provision for remittance of money to residents outside India on account of liquidation of an India company would help bring in greater clarity.

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