Q. 1.

What are the forms in which business can be

conducted by a foreign company in India?
Ans. A foreign company planning to set up business
operations in India may:
Incorporate a company under the Companies Act, 195
6, as a Joint Venture or a Wholly Owned Subsidiary
.
Set up a Liaison Office / Representative Office or
a Project Office or a Branch Office of the foreig
n company which can undertake activities permitted
under the Foreign Exchange Management (Establishm
ent in India of Branch Office or Other Place of Bu
siness) Regulations, 2000.
Q.2. What is the procedure for receiving Foreign Di
rect Investment in an Indian company?
Ans. An Indian company may receive Foreign Direct
Investment under the two routes as given under:
i. Automatic Route
FDI is allowed under the automatic route without p
rior approval either of the Government or the Rese
rve Bank of India in all activities/sectors as spe
cified in the consolidated FDI Policy, issued by t
he Government of India from time to time.
ii. Government Route
FDI in activities not covered under the automatic
route requires prior approval of the Government wh
ich are considered by the Foreign Investment Promo
tion Board (FIPB), Department of Economic Affairs,
Ministry of Finance. Application can be made in F
orm FC-IL, which can be downloaded from http://www
.dipp.gov.in. Plain paper applications carrying al
l relevant details are also accepted. No fee is pa
yable.
The Indian company having received FDI either unde
r the Automatic route or the Government route is r
equired to comply with provisions of the FDI polic
y including reporting the FDI to the Reserve Bank
as stated in Q 4.
Q.3. What are the instruments for receiving Foreign
Direct Investment in an Indian company?
Ans. Foreign investment is reckoned as FDI only if
the investment is made in equity shares, fully an
d mandatorily convertible preference shares and fu
lly and mandatorily convertible debentures with th
e pricing being decided upfront as a figure or bas
ed on the formula that is decided upfront. Partly
paid equity shares and warrants issued by an India
n company in accordance with the provision of the
Companies Act, 2013 and the SEBI guidelines, as ap
plicable, shall be treated as eligible FDI instrum
ents w.e.f. July 8, 2014 subject to compliance wit
h FDI scheme. The pricing and receipt of balance c
onsideration shall be as stipulated in terms of A.
P.(DIR Series) Circular No.3 dated July 14, 2014 a
s modified from time to time.
Any foreign investment into an instrument issued by
an Indian company which:
gives an option to the investor to convert or not t
o convert it into equity or
does not involve upfront pricing of the instrument
as a date would be reckoned as ECB and would have
to comply with the ECB guidelines.
The FDI policy provides that the price/ conversion
formula of convertible capital instruments should
be determined upfront at the time of issue of the
instruments. The price at the time of conversion
should not in any case be lower than the fair valu
e worked out, at the time of issuance of such inst
ruments, in accordance with the extant FEMA regula
tions [valuation as per any internationally accept
ed pricing methodology on arms length basis for t
he unlisted companies and valuation in terms of SE
BI (ICDR) Regulations, for the listed companies] w
ithout any assured return.
Q.4. What are the modes of payment allowed for rec
eiving Foreign Direct Investment in an Indian comp
any?
Ans. An Indian company issuing shares /convertible
debentures under FDI Scheme to a person resident
outside India shall receive the amount of consider
ation required to be paid for such shares /convert
ible debentures by:
(i) inward remittance through normal banking channe
ls.
(ii) debit to NRE / FCNR account of a person concer
ned maintained with an AD category I bank.
(iii) conversion of royalty / lump sum / technical
know how fee due for payment or conversion of ECB
, shall be treated as consideration for issue of s
hares.
(iv) conversion of import payables / pre incorpora
tion expenses / share swap can be treated as consi
deration for issue of shares with the approval of
FIPB.
(v) debit to non-interest bearing Escrow account i
n Indian Rupees in India which is opened with the
approval from AD Category I bank and is maintain
ed with the AD Category I bank on behalf of reside
nts and non-residents towards payment of share pur
chase consideration.
If the shares or convertible debentures are not is
sued within 180 days from the date of receipt of t
he inward remittance or date of debit to NRE / FCN
R (B) / Escrow account, the amount shall be refund
ed. Further, Reserve Bank may on an application ma
de to it and for sufficient reasons permit an Indi
an Company to refund / allot shares for the amount
of consideration received towards issue of securi
ty if such amount is outstanding beyond the period
of 180 days from the date of receipt.
Q.5. Which are the sectors where FDI is not allowe
d in India, both under the Automatic Route as well
as under the Government Route?
Ans. FDI is prohibited under the Government Route
as well as the Automatic Route in the following se
ctors:
i) Atomic Energy
ii) Lottery Business
iii) Gambling and Betting
iv) Business of Chit Fund
v) Nidhi Company
vi) Agricultural (excluding Floriculture, Horticul
ture, Development of seeds, Animal Husbandry, Pisc
iculture and cultivation of vegetables, mushrooms,
etc. under controlled conditions and services rel
ated to agro and allied sectors) and Plantations a
ctivities (other than Tea Plantations) (c.f. Notif
ication No. FEMA 94/2003-RB dated June 18, 2003).
vii) Housing and Real Estate business (except deve
lopment of townships, construction of residen-tial
/commercial premises, roads or bridges to the exte
nt specified in Notification No. FEMA 136/2005-RB
dated July 19, 2005).
viii) Trading in Transferable Development Rights (T
DRs).
ix) Manufacture of cigars, cheroots, cigarillos an
d cigarettes, of tobacco or of tobacco substitutes
.
(Please also see the website of Department of Indu
strial Policy and Promotion (DIPP), Ministry of Co
mmerce & Industry, Government of India at www.dipp
.gov.in for details regarding sectors and investme
nt limits therein allowed, under FDI)
Q.6. What is the procedure to be followed after in
vestment is made under the Automatic Route or with
Government approval?
Ans. A two-stage reporting procedure has to be foll
owed :
On receipt of share application money:
Within 30 days of receipt of share application mon
ey/amount of consideration from the non-resident i
nvestor, the Indian company is required to report
to the Foreign Exchange Department, Regional Offic
e concerned of the Reserve Bank of India, under wh
ose jurisdiction its Registered Office is located,
the Advance Reporting Form, containing the follow
ing details :
Name and address of the foreign investor/s;
Date of receipt of funds and the Rupee equivalent;
Name and address of the authorised dealer through w
hom the funds have been received;
Details of the Government approval, if any; and
KYC report on the non-resident investor from the o
verseas bank remitting the amount of consideration
.
The Indian company has to ensure that the shares a
re issued within 180 days from the date of inward
remittance which otherwise would result in the con
travention / violation of the FEMA regulations.
Upon issue of shares to non-resident investors:
Within 30 days from the date of issue of shares, a
report in Form FC-GPR- PART A together with the f
ollowing documents should be filed with the Foreig
n Exchange Department, Regional Office concerned o
f the Reserve Bank of India.
Certificate from the Company Secretary of the co
mpany accepting investment from persons resident o
utside India certifying that:
The company has complied with the procedure for is
sue of shares as laid down under the FDI scheme as
indicated in the Notification No. FEMA 20/2000-RB
dated 3rd May 2000, as amended from time to time.
The investment is within the sectoral cap / stat
utory ceiling permissible under the Automatic Rout
e of the Reserve Bank and it fulfills all the cond
itions laid down for investments under the Automat
ic Route,
OR
Shares have been issued in terms of SIA/FIPB app
roval No. --------------------- dated ------------
-------- (enclosing the FIPB approval copy)
Certificate from Statutory Auditors/ SEBI regist
ered Merchant Banker / Chartered Accountant indica
ting the manner of arriving at the price of the sh
ares issued to the persons resident outside India.
Q.7. What are the guidelines for transfer of exist
ing shares from non-residents to residents or resi
dents to non-residents?
Ans. The term transfer is defined under FEMA as
including "sale, purchase, acquisition, mortgage,
pledge, gift, loan or any other form of transfer o
f right, possession or lien {Section 2 (ze) of FE
MA, 1999}.
The following share transfers are allowed without
the prior approval of the Reserve Bank of India
A. Transfer of shares from a Non Resident to Resid
ent under the FDI scheme where the pricing guideli
nes under FEMA, 1999 are not met provided that :-
i. The original and resultant investment are in li
ne with the extant FDI policy and FEMA regulations
in terms of sectoral caps, conditionalities (such
as minimum capitalization, etc.), reporting requi
rements, documentation, etc.;
ii. The pricing for the transaction is compliant w
ith the specific/explicit, extant and relevant SEB
I regulations / guidelines (such as IPO, Book buil
ding, block deals, delisting, exit, open offer/ su
bstantial acquisition / SEBI SAST, buy back); and
iii. Chartered Accountants Certificate to the effe
ct that compliance with the relevant SEBI regulati
ons / guidelines as indicated above is attached to
the form FC-TRS to be filed with the AD bank.
B. Transfer of shares from Resident to Non Resident
:
i) where the transfer of shares requires the prior
approval of the FIPB as per the extant FDI policy
provided that :
a) the requisite approval of the FIPB has been obta
ined; and
b) the transfer of share adheres with the pricing
guidelines and documentation requirements as speci
fied by the Reserve Bank of India from time to tim
e.
ii) where SEBI (SAST) guidelines are attracted sub
ject to the adherence with the pricing guidelines
and documentation requirements as specified by Res
erve Bank of India from time to time.
iii) where the pricing guidelines under the Foreig
n Exchange Management Act (FEMA), 1999 are not met
provided that:-
The resultant FDI is in compliance with the extant
FDI policy and FEMA regulations in terms of secto
ral caps, conditionalities (such as minimum capita
lization, etc.), reporting requirements, documenta
tion etc.;
The pricing for the transaction is compliant with
the specific/explicit, extant and relevant SEBI re
gulations / guidelines (such as IPO, Book building
, block deals, delisting, exit, open offer/ substa
ntial acquisition / SEBI SAST); and
Chartered Accountants Certificate to the effect th
at compliance with the relevant SEBI regulations /
guidelines as indicated above is attached to the
form FC-TRS to be filed with the AD bank
iv) where the investee company is in the financial
sector provided that :
The FDI policy and FEMA regulations in terms of en
try route, sectoral caps, conditionalities (such a
s minimum capitalization, etc.), reporting require
ments, documentation etc., are complied with.
Transfer of shares/ fully and mandatorily convertib
le debentures by way of Gift:
A person resident outside India can freely transfe
r shares/ fully and mandatorily convertible debent
ures by way of gift to a person resident in India
as under:
Any person resident outside India, (not being a NR
I or an erstwhile OCB), can transfer by way of gif
t the shares/ fully and mandatorily convertible de
bentures to any person resident outside India (inc
luding NRIs but excluding OCBs).
Note: Transfer of shares from or by erstwhile OCBs
would require prior approval of the Reserve Bank
of India.
a NRI may transfer by way of gift, the shares/conv
ertible debentures held by him to another NRI only
,
Any person resident outside India may transfer sha
re/ fully and mandatorily convertible debentures t
o a person resident in India by way of gift.
Q.8. Can a person resident in India transfer secur
ity by way of gift to a person resident outside In
dia?
Ans. A person resident in India who proposes to tr
ansfer security by way of gift to a person residen
t outside India [other than an erstwhile OCBs] sha
ll make an application to the Central Office of th
e Foreign Exchange Department, Reserve Bank of Ind
ia furnishing the following information, namely:
Name and address of the transferor and the proposed
transferee
Relationship between the transferor and the propose
d transferee
Reasons for making the gift.
In case of Government dated securities, treasury b
ills and bonds, a certificate issued by a Chartere
d Accountant on the market value of such securitie
s.
In case of units of domestic mutual funds and unit
s of Money Market Mutual Funds, a certificate from
the issuer on the Net Asset Value of such securit
y.
In case of shares/ fully and mandatorily convertib
le debentures, a certificate from a Chartered Acco
untant on the value of such securities according
to the guidelines issued by the Securities & Excha
nge Board of India or the valuation as per any int
ernationally accepted pricing methodology on arms
length basis with regard to listed companies and
unlisted companies, respectively.
Certificate from the Indian company concerned cert
ifying that the proposed transfer of shares/conver
tible debentures, by way of gift, from resident to
the non-resident shall not breach the applicable
sectoral cap/ FDI limit in the company and that th
e proposed number of shares/convertible debentures
to be held by the non-resident transferee shall n
ot exceed 5 per cent of the paid up capital of the
company.
The transfer of security by way of gift may be perm
itted by the Reserve bank provided:
(i) The donee is eligible to hold such security un
der Schedules 1, 4 and 5 to Notification No. FEMA
20/2000-RB dated May 3, 2000, as amended from time
to time.
(ii) The gift does not exceed 5 per cent of the pa
id up capital of the Indian company/ each series o
f debentures/ each mutual fund scheme
(iii) The applicable sectoral cap/ foreign direct
investment limit in the Indian company is not brea
ched
(iv) The donor and the donee are relatives as defi
ned in section 6 of the Companies Act, 1956.
(v) The value of security to be transferred by the
donor together with any security transferred to a
ny person residing outside India as gift in the fi
nancial year does not exceed the rupee equivalent
of USD 50000.
(vi) Such other conditions as considered necessary
in public interest by the Reserve Bank.
Q.9. What if the transfer of shares from resident
to non-resident does not fall under the above cate
gories?
Ans.
Transfer of Shares by Resident which requires Gover
nment approval
The following instances of transfer of shares from
residents to non-residents by way of sale or othe
rwise requires Government approval:
(i) Transfer of shares of companies engaged in sect
or falling under the Government Route.
(ii) Transfer of shares resulting in foreign inves
tments in the Indian company, breaching the sector
al cap applicable.
Prior permission of the Reserve Bank in certain ca
ses for acquisition / transfer of security
i) Transfer of shares or convertible debentures fr
om residents to non-residents by way of sale requi
res prior approval of Reserve Bank in case where t
he non-resident acquirer proposes deferment of pay
ment of the amount of consideration. Further, in c
ase approval is granted for the transaction, the s
ame should be reported in Form FC-TRS to the AD Ca
tegory I bank, within 60 days from the date of r
eceipt of the full and final amount of consideration.
(ii) A person resident in India, who intends to tr
ansfer any security, by way of gift to a person re
sident outside India, has to obtain prior approval
from the Reserve Bank.
Any other case not covered by General Permission.
Q 10. What are the reporting obligations in case o
f transfer of shares between resident and non-resi
dent?
Ans. The transaction should be reported by submiss
ion of form FC-TRS to the AD Category I bank, wi
thin 60 days from the date of receipt/remittance o
f the amount of consideration. The onus of submiss
ion of the form FC-TRS within the given timeframe
would be on the resident in India, the transferor
or transferee, as the case may be.
Q.11. What is the method of payment and remittance
/credit of sale proceeds in case of transfer of sh
ares between resident and non-resident?
Ans. The sale consideration in respect of the shar
es purchased by a person resident outside India sh
all be remitted to India through normal banking ch
annels. In case the buyer is a Foreign Institution
al Investor (FII), payment should be made by debit
to its Special Non-Resident Rupee Account. In cas
e the buyer is a NRI, the payment may be made by w
ay of debit to his NRE/FCNR (B) accounts. However,
if the shares are acquired on non-repatriation ba
sis by NRI, the consideration shall be remitted to
India through normal banking channel or paid out
of funds held in NRE/FCNR (B)/NRO accounts.
The sale proceeds of shares (net of taxes) sold by
a person resident outside India) may be remitted
outside India. In case of FII the sale proceeds ma
y be credited to its special Non-Resident Rupee Ac
count. In case of NRI, if the shares sold were hel
d on repatriation basis, the sale proceeds (net of
taxes) may be credited to his NRE/FCNR(B) account
s and if the shares sold were held on non repatria
tion basis, the sale proceeds may be credited to h
is NRO account subject to payment of taxes. The sa
le proceeds of shares (net of taxes) sold by an er
stwhile OCB may be remitted outside India directly
if the shares were held on repatriation basis and
if the shares sold were held on non-repatriation
basis, the sale proceeds may be credited to its NR
O (Current) Account subject to payment of taxes, e
xcept in the case of erstwhile OCBs whose accounts
have been blocked by Reserve Bank.
Q. 12. Are the investments and profits earned in In
dia repatriable?
Ans. All foreign investments are freely repatriabl
e (net of applicable taxes) except in cases where:
i) the foreign investment is in a sector like Cons
truction and Development Projects and Defence wher
ein the foreign investment is subject to a lock-in
-period; and
ii) NRIs choose to invest specifically under non-re
patriable schemes.
Further, dividends (net of applicable taxes) decla
red on foreign investments can be remitted freely
through an Authorised Dealer bank.
Q.13. What are the guidelines on issue and valuatio
n of shares in case of existing companies?
Ans.
A. The price of shares issued to persons resident
outside India under the FDI Scheme shall not be le
ss than :
(i) the price worked out in accordance with the SE
BI guidelines, as applicable, where the shares of
the company is listed on any recognised stock exch
ange in India;
(ii) the fair valuation of shares done by a SEBI r
egistered Category - I Merchant Banker or a Charte
red Accountant as per the discounted free cash flo
w method, where the shares of the company is not l
isted on any recognised stock exchange in India; and
(iii) the price as applicable to transfer of share
s from resident to non-resident as per the pricing
guidelines laid down by the Reserve Bank from tim
e to time, where the issue of shares is on prefere
ntial allotment.
B. The price of shares transferred from resident t
o a non-resident and vice versa should be determin
ed as under:
i) Transfer of shares from a resident to a non-resi
dent:
a) In case of listed shares, at a price which is n
ot less than the price at which a preferential all
otment of shares would be made under SEBI guidelin
es.
b) In case of unlisted shares at a price which is
not less than the fair valuation as per any intern
ationally accepted pricing methodology on arms le
ngth basis to be determined by a SEBI registered C
ategory-I- Merchant Banker/Chartered Accountant.
ii) Transfer of shares from a non-resident to a re
sident - The price should not be more than the min
imum price at which the transfer of shares would h
ave been made from a resident to a non-resident.
In any case, the price per share arrived at as per
the above method should be certified by a SEBI re
gistered Category-I-Merchant Banker / Chartered Ac
countant.
Q.14. What are the regulations pertaining to issue
of ADRs/ GDRs by Indian companies?
Ans. Indian companies can raise foreign currency r
esources abroad through the issue of ADRs/ GDRs, i
n accordance with the Scheme for issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Th
rough Depository Receipt Mechanism) Scheme, 1993 a
nd guidelines issued by the Government of India th
ereunder from time to time.
A company can issue ADRs / GDRs, if it is eligible
to issue shares to persons resident outside India
under the FDI Scheme. However, an Indian listed c
ompany, which is not eligible to raise funds from
the Indian Capital Market including a company whic
h has been restrained from accessing the securitie
s market by the Securities and Exchange Board of I
ndia (SEBI) will not be eligible to issue ADRs/GDRs.
After the issue of ADRs/GDRs, the company has to f
ile a return in Form DR as indicated in the RBI No
tification No. FEMA.20/ 2000-RB dated May 3, 2000,
as amended from time to time. The company is also
required to file a quarterly return in Form DR- Q
uarterly as indicated in the RBI Notification ibid.
Unlisted companies incorporated in India to raise
capital abroad, without the requirement of prior o
r subsequent listing in India, initially for a per
iod of two years, subject to conditions mentioned
below. This scheme will be implemented from the da
te of the Government Notification of the scheme, s
ubject to review after a period of two years. The
investment shall be subject to the following condi
tions:
(a) Unlisted Indian companies shall list abroad on
ly on exchanges in IOSCO/FATF compliant jurisdicti
ons or those jurisdictions with which SEBI has sig
ned bilateral agreements;
(b) The ADRs/ GDRs shall be issued subject to sect
oral cap, entry route, minimum capitalisation norm
s, pricing norms, etc. as applicable as per FDI re
gulations notified by the Reserve Bank from time t
o time;
(c) The pricing of such ADRs/GDRs to be issued to
a person resident outside India shall be determine
d in accordance with the captioned scheme as presc
ribed under paragraph 6 of Schedule 1 of Notificat
ion No. FEMA. 20 dated May 3, 2000, as amended fro
m time to time;
(d) The number of underlying equity shares offered
for issuance of ADRs/GDRs to be kept with the loc
al custodian shall be determined upfront and ratio
of ADRs/GDRs to equity shares shall be decided up
front based on applicable FDI pricing norms of equ
ity shares of unlisted company;
(e) The unlisted Indian company shall comply with
the instructions on downstream investment as notif
ied by the Reserve Bank from time to time;
(f) The criteria of eligibility of unlisted compan
y raising funds through ADRs/GDRs shall be as pres
cribed by Government of India;
(g) The capital raised abroad may be utilised for
retiring outstanding overseas debt or for bona fid
e operations abroad including for acquisitions;
(h) In case the funds raised are not utilised abro
ad as stipulated above, the company shall repatria
te the funds to India within 15 days and such mone
y shall be parked only with AD Category-1 banks re
cognised by RBI and shall be used for eligible pur
poses;
(i) The unlisted company shall report to the Reser
ve Bank as prescribed under sub-paragraphs (2) and
(3) of Paragraph 4 of Schedule 1 to FEMA Notifica
tion No. 20.
Erstwhile OCBs which are not eligible to invest in
India and entities prohibited to buy, sell or dea
l in securities by SEBI will not be eligible to su
bscribe to ADRs / GDRs issued by Indian companies.
The pricing of ADR / GDR issues including sponsore
d ADRs / GDRs should be made at a price determined
under the provisions of the Scheme of issue of Fo
reign Currency Convertible Bonds and Ordinary Shar
es (Through Depository Receipt Mechanism) Scheme,
1993 and guidelines issued by the Government of In
dia and directions issued by the Reserve Bank, fro
m time to time.
Q.15. What is meant by Sponsored ADR & Two-way fung
ibility Scheme of ADR/ GDR?
Ans. Sponsored ADR/GDR: An Indian company may spon
sor an issue of ADR/ GDR with an overseas deposito
ry against shares held by its shareholders at a pr
ice to be determined by the Lead Manager. The oper
ative guidelines for the same have been issued vid
e A.P. (DIR Series) Circular No.52 dated November
23, 2002.
Two-way fungibility Scheme: Under the limited Two-
way fungibility Scheme, a registered broker in Ind
ia can purchase shares of an Indian company on beh
alf of a person resident outside India for the pur
pose of converting the shares so purchased into AD
Rs/ GDRs. The operative guidelines for the same ha
ve been issued vide A.P. (DIR Series) Circular No.
21 dated February 13, 2002. The Scheme provides fo
r purchase and re-conversion of only as many share
s into ADRs/ GDRs which are equal to or less than
the number of shares emerging on surrender of ADRs
/ GDRs which have been actually sold in the market
. Thus, it is only a limited two-way fungibility w
herein the headroom available for fresh purchase o
f shares from domestic market is restricted to the
number of converted shares sold in the domestic m
arket by non-resident investors. So long the ADRs/
GDRs are quoted at discount to the value of share
s in domestic market, an investor will gain by con
verting the ADRs/ GDRs into underlying shares and
selling them in the domestic market. In case of AD
Rs/ GDRs being quoted at premium, there will be de
mand for reverse fungibility, i.e. purchase of sha
res in domestic market for re-conversion into ADRs
/ GDRs. The scheme is operationalised through the
Custodians of securities and stock brokers under SEBI.
Q.16. Can Indian companies issue Foreign Currency C
onvertible Bonds (FCCBs)?
Ans. FCCBs can be issued by Indian companies in th
e overseas market in accordance with the Scheme fo
r Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechan
ism) Scheme, 1993.
The FCCB being a debt security, the issue needs to
conform to the External Commercial Borrowing guid
elines, issued by RBI vide Notification No. FEMA 3
/2000-RB dated May 3, 2000, as amended from time t
o time.
Q.17. Can a foreign investor invest in Preference
Shares? What are the regulations applicable in cas
e of such investments?
Ans. Yes. Foreign investment through preference sh
ares is treated as foreign direct investment. Howe
ver, the preference shares should be fully and man
datorily convertible into equity shares within a s
pecified time to be reckoned as part of share capi
tal under FDI. Investment in other forms of prefer
ence shares requires to comply with the ECB norms.
Q.18. Can a company issue debentures as part of FDI
?
Ans. Yes. Debentures which are fully and mandatori
ly convertible into equity within a specified time
would be reckoned as part of share capital under
the FDI Policy.
Q.19. Can shares be issued against Lumpsum Fee, Ro
yalty, ECB , Import of capital goods/ machineries
/ equipments (excluding second-hand machine) and P
re-operative/pre-incorporation expenses (including
payments of rent)?
Ans. An Indian company eligible to issue shares un
der the FDI policy and subject to pricing guidelin
es as specified by the Reserve Bank from time to t
ime, may issue shares to a person resident outside
India :
being a provider of technology / technical know-ho
w, against Royalty / Lumpsum fees due for payment;
against External Commercial Borrowing (ECB) (other
than import dues deemed as ECB or Trade Credit as
per RBI Guidelines).
With prior approval from FIPB for against import o
f capital goods/ machineries / equipments and Pre-
operative/pre-incorporation expenses subject to th
e compliance with the extant FEMA regulations and
AP Dir Series 74 dated June 30, 2011.
Provided, that the foreign equity in the company,
after such conversion, is within the sectoral cap.
Q.20. What are the other modes of issues of shares
for which general permission is available under R
BI Notification No. FEMA 20 dated May 3, 2000?
Ans.
Issue of shares under ESOP by Indian companies to
its employees or employees of its joint venture or
wholly owned subsidiary abroad who are resident o
utside India directly or through a Trust up to 5%
of the paid up capital of the company.
Issue and acquisition of shares by non-residents a
fter merger or de-merger or amalgamation of Indian
companies.
Issue shares or preference shares or convertible d
ebentures on rights basis by an Indian company to
a person resident outside India.
Q.21. Can a foreign investor invest in shares issue
d by an unlisted company in India?
Ans. Yes. As per the regulations/guidelines issued
by the Reserve Bank of India/Government of India,
investment can be made in shares issued by an unl
isted Indian company.
Q.22. Can a foreigner set up a partnership/ proprie
torship concern in India?
Ans. No. Only NRIs/PIOs are allowed to set up part
nership/proprietorship concerns in India on non-re
patriation basis.
Q.23. Can a foreign investor invest in Rights shar
es issued by an Indian company at a discount?
Ans. There are no restrictions under FEMA for inve
stment in Rights shares issued at a discount by an
Indian company, provided the rights shares so iss
ued are being offered at the same price to residen
ts and non-residents. The offer on right basis to
the persons resident outside India shall be:
(a) in the case of shares of a company listed on a
recognized stock exchange in India, at a price as
determined by the company; and
(b) in the case of shares of a company not listed
on a recognized stock exchange in India, at a pric
e which is not less than the price at which the of
fer on right basis is made to resident shareholder
s.
Q.24. Can an AD bank allow pledge of shares of an
Indian company held by non-resident investor in fa
vour of an Indian bank or an Overseas bank or NBFC?
Ans. Yes, the same has been allowed vide the instr
uction sand subject to compliance with the terms a
nd conditions as mentioned in the AP (Dir Series)
Circular No 57 dated May 2, 2011 and A.P. (DIR Ser
ies) Circular No.141 dated June 6, 2014.
Q.25. What declaration/certificate needs to be obt
ained by the AD in respect of utilization of loan
proceeds for the declared purpose, consequent to p
ledge of shares, to comply with para. 2 (i) (b) of
the A. P. (DIR Series) Circular No. 57 dated May
2, 2011?
Ans. The AD may obtain a board resolution ex ante
passed by the Board of Directors of the investee
company, that the loan proceeds received conseque
nt to pledge of shares, will be utilised by the in
vestee company for the declared purpose.
The AD may also obtain a certificate from the stat
utory auditor ex post of the investee company, t
hat the loan proceeds received consequent to pledg
e of shares, have been utilised by the investee co
mpany for the declared purpose.
Q.26. Is a non-resident permitted to acquire share
on stock exchange under FDI scheme?
Ans: Prior to issuance of A.P (DIR Series) Circula
r No. 38, dated September 6, 2013, no person resid
ent outside India except a portfolio investor was
allowed to acquire shares on stock exchange.
Portfolio Investors registered with SEBI namely FI
I and QFI were eligible to acquire shares on stock
exchange in accordance with the requirements. Fur
ther, NRIs were also permitted to acquire shares o
n stock exchange, on repatriation and non-repatria
tion basis, in accordance with portfolio investmen
t scheme for them.
With effect from August 5, 2013 (date of publicati
on of relevant notification), a non-resident, othe
r than portfolio investor, is eligible to acquire
shares on stock exchange through a registered brok
er subject to the condition that the non-resident
investor has already acquired and continues to hol
d the control in accordance with SEBI (Substantial
Acquisition of Shares and Takeover) Regulations i
.e. he has complied with the minimum stake require
ment under SEBI Regulations.
Q.27. What will be the pricing norms for a non-res
ident permitted to acquire share on stock exchange
under FDI scheme?
Ans: He shall acquire shares at the ruling market p
rice.
Q.28. Whether the non-resident, permitted to acqui
re shares on stock exchange under FDI scheme, can
sell those shares?
Ans: Non-Residents were already permitted to sell
the shares on the recognised stock exchange in acc
ordance with Regulation 9(2)(iii(b) of Notificatio
n FEMA No. 20 dated May 3, 2000.
Yes, the non-resident shall be at liberty to sell
those shares as applicable under FDI guidelines. T
he shares acquired under the present scheme shall
be treated as acquisition under FDI scheme and as
such all requirement namely, sectoral cap, entry r
oute, pricing, reporting, documentation etc. would
have to be complied.
Thus, non-resident having acquired shares under th
e scheme can subsequently transfer shares under FD
I scheme.
Q29. What will be mode of payment for the non-resi
dent permitted to acquire share on stock exchange
under FDI scheme?
Ans: The Non-Resident permitted to acquire shares
under the scheme can use following mode for paymen
t of shares:
by way of inward remittance through normal banking
channels, or
by way of debit to the NRE/FCNR account of the per
son concerned maintained with an authorised dealer
/bank;
by debit to non-interest bearing Escrow account (i
n Indian Rupees) maintained in India with the AD b
ank in accordance with Foreign Exchange Management
(Deposit) Regulations, 2000;
the consideration amount may also be paid out of t
he dividend payable by Indian investee company, in
which the said non-resident holds control, provid
ed the right to receive dividend is established an
d the dividend amount has been credited to special
ly designated non-interest bearing rupee account f
or acquisition of shares on the floor of stock exc
hange.
Q.30. Can an escrow account be opened without RBI
permission for the non-resident permitted to acqui
re share on stock exchange under FDI scheme?
Ans: Yes, an escrow account for the purpose can be
opened under General Permission under Regulation
5(5) of Foreign Exchange Management (Deposit) Regu
lations. [c.f. FEMA Notification No. 280 dated Jul
y 10, 2013]
Q.31. What is the meaning of Indian company?
Ans: An Indian Company means a company registered u
nder the Companies Act, 1956/2013.
Q.32. What is the concept of downstream investment?
Ans: In common understanding, downstream investmen
t would mean investment by a company in another co
mpany by way of subscription or acquisition of sha
res or acquisition of control. The investment in a
nother Indian company (downstream) by an Indian co
mpany already having foreign investment is called
downstream investment subject to conditions of own
ership and control. Thus, there will be two Indian
Companies, a first level company which has accept
ed foreign investment and in turn has made investm
ent in a second level company i.e. another Indian
company. [c.f. A.P. (DIR Series) Circular Numbers
1, 42 and 44 respectively dated July 4, 2013, Sept
ember 13, 2013 and September 13, 2013].
Q.33. What will be the composition of direct forei
gn investment?
Ans: The concept direct foreign investment means
foreign investment in any Indian company made dir
ectly in form of Foreign Direct Investment (FDI),
Portfolio investment from Foreign Institutional In
vestment (FII), Non-Resident Indian and Qualified
Foreign Investor (QFI), Foreign Venture Capital In
vestor i.e. under Schedule 1, 2, 3, 6 and 8 of the
Notification No. FEMA.20/2000-RB dated May 3, 200
0, as amended from time to time. Thus, the investm
ent in the above manner will be aggregated in firs
t level Indian Company. Such first level Indian Co
mpany obviously cannot have indirect foreign inves
tment.
Q.34. What about foreign investment in second level
Indian Company?
Ans: The second level Indian Company can have dir
ect foreign investment as explained above and als
o have investment from another Indian company whic
h is not resident owned and controlled i.e. indi
rect foreign investment.
Further, the methodology for calculation of total
foreign investment i.e. direct as well as indirect
foreign investment would apply at every stage of
investment in Indian companies and thus in each an
d every Indian company.
Q.35. What is the meaning of resident owned India
n Company?
Ans: An Indian company be treated as Owned by res
ident Indian citizens if more than 50% of the cap
ital in it is beneficially owned by resident India
n citizens and/or Indian companies, which are ulti
mately owned and controlled by resident Indian cit
izens. Thus, computation of such percentage would
require ascertaining shareholding by resident Ind
ian citizens and if the shareholding of such comp
any is held by another Indian companies each of su
ch Indian companies are ultimately owned and contr
olled by resident Indian citizens. It is clarified
the such Indian owners are not only resident with
in meaning of Section 2(v) of FEMA, 1999 but are a
lso citizen of India. The shareholding of a foreig
n citizen who has become resident within meaning o
f Section 2(v) ibid will not be aggregated for the
benchmark of 50% and above.
Further, for Information & Broadcasting and defenc
e sector if a declaration is made by persons as pe
r section 187C of the Indian Companies Act about a
beneficial interest being held by a non-resident
entity, then even though the investment may be mad
e by a resident Indian citizen, the same shall be
counted as foreign investment.
Q.36. What is meaning of control?
Ans: 'Control' shall include the right to appoint
a majority of the directors or to control the mana
gement or policy decisions including by virtue of
their shareholding or management rights or shareho
lders agreements or voting agreements. For ascerta
ining control by resident Indian citizens the abov
e norms shall be applied.
Q.37. What will be the composition of indirect for
eign investment?
Ans: Indirect foreign investment means entire in
vestment in other Indian companies by an Indian co
mpany (IC), having foreign investment in it provid
ed IC is not owned and controlled by resident In
dian citizens and/or Indian Companies which are ow
ned and controlled by resident Indian citizens or
where the IC is owned or controlled by non-residen
ts. However, as an exception, the indirect foreign
investment in the 100% owned subsidiaries of oper
ating-cum-investing/investing companies will be li
mited to the foreign investment in the operating-c
um-investing/ investing company. Thus, if an India
n company A has 60% FDI/ADR/GDR/Portfolio investme
nt/FCCB/FVCI in it, invests in 100% of the shareho
lding of another Indian company B, it will be take
n as B has indirect foreign investment of 60%. But
, foreign owned Indian company A, having foreign i
nvestment of more than 50% but less than 100%, inv
ests in 20% of the shareholding of another Indian
company B, it will be taken as B has indirect fore
ign investment of 20%.
Q.38. Are there any exception on application of dow
nstream investment?
Ans: The downstream rule may not be applied in foll
owing cases:
Where the first level Indian company is owned and c
ontrolled by resident Indian citizens;
Where the second level Indian company is engaged i
n an activity eligible for 100% foreign investment
under automatic route;
where for investment in sectors it is specified in
a statute or a rule there under. The above method
ology of determining direct and indirect foreign i
nvestment therefore does not apply to the insuranc
e sector which will continue to be governed by the
relevant Regulation;
Downstream investment/s made by a banking company,
as defined in clause (c) of Section 5 of the Bank
ing Regulation Act, 1949, incorporated in India, w
hich is owned and/or controlled by non-residents/
a non-resident entity/non-resident entities, under
Corporate Debt Restructuring (CDR), or other loan
restructuring mechanism, or in trading books, or
for acquisition of shares due to defaults in loans
, shall not count towards indirect foreign investm
ent.
Q.39. What are implications of applicability of dow
nstream rule:
Ans: While the norms of foreign investment for fir
st level Indian company were already in place, the
downstream investment in second level Indian comp
anies would now have to be in accordance/ complian
ce with the relevant sectoral conditions on entry
route, conditionalities and caps.
Such a company has to notify Secretariat for Indus
trial Assistance, DIPP and FIPB of its downstream
investment in the form available at http://www.fip
bindia.com within 30 days of such investment, even
if capital instruments have not been allotted alo
ng with the modality of investment in new/existing
ventures (with/without expansion programme).
The downstream investment by way of induction of f
oreign equity in an existing Indian Company to be
duly supported by a resolution of its Board of Dir
ectors as also a Shareholders Agreement, if any;
The issue/transfer/pricing/valuation of shares sha
ll continue to be in accordance with extant SEBI/R
BI guidelines;
For the purpose of downstream investment, the Indi
an companies making the downstream investments wou
ld have to bring in requisite funds from abroad an
d not use funds borrowed in the domestic market. T
his would, however, not preclude downstream operat
ing companies, from raising debt in the domestic m
arket. Downstream investments through internal acc
ruals are permissible.
Q.40. As portfolio investment may undergo change q
uite frequently, it will be difficult to monitor d
ownstream investment?
Ans: To facilitate such computation, for the purpo
se portfolio investments either by FIIs, NRIs or Q
FIs holding as on March 31 of the previous year wo
uld be taken into account. e.g. for monitoring for
eign investment for the financial year 2011-12, po
rtfolio investment as on March 31, 2011 would be t
aken into account.
Q.41. What is the procedure to ensure compliance wi
th the downstream investment guidelines?
Ans: The FDI recipient Indian company at the first
level which is responsible for ensuring complianc
e with the FDI conditionalities like no indirect f
oreign investment in prohibited sector, entry rout
e, sectoral cap/conditionalities, etc. for the dow
nstream investment made by in the subsidiary compa
nies at second level and so on and so forth would
obtain a certificate to this effect from its statu
tory auditor on an annual basis as regards status
of compliance with the instructions on downstream
investment and compliance with FEMA provisions. Th
e fact that statutory auditor has certified that t
he company is in compliance with the regulations a
s regards downstream investment and other FEMA pre
scriptions will be duly mentioned in the Director
s report in the Annual Report of the Indian compan
y. In case statutory auditor has given a qualified
report, the same shall be immediately brought to
the notice of the Reserve Bank of India, Foreign E
xchange Department (FED), Regional Office (RO) of
the Reserve Bank in whose jurisdiction the Registe
red Office of the company is located.
Q.42. What will be the role of Regional Office of R
BI?
Ans: Where the statutory auditor has given qualifi
ed report about the downstream investment, RO shal
l take action to ensure compliance in consultation
with the Central Office.
Q.43. Since the instructions were issued by RBI in
2013 for the period commencing from February 13,
2009, how to ensure compliance retrospectively?
Ans: As regards investments made between February
13, 2009 and the date of publication of the FEMA n
otification i.e. June 21, 2013, Indian companies s
hall be required to intimate, within 90 days from
the date of this circular, through an AD Category
I bank to the concerned Regional Office of the Res
erve Bank, in whose jurisdiction the Registered Of
fice of the company is located, detailed position
where the issue/transfer of shares or downstream i
nvestment is not in conformity with the regulatory
framework now being prescribed. Reserve Bank shal
l consider treating such cases as compliant with t
hese guidelines within a period of six months or s
uch extended time as considered appropriate by RBI
in consultation with Government of India.
ROs shall forward such consolidated statement to t
he Central Office with their comments for ensuring
compliance with the instructions.
Q.44. Is first level Indian investee company makin
g downstream investment required to file FC-GPR?
Ans: No, it is not required. FC-GPR is not to be f
iled by the first level Indian Investee Company at
the time of making downstream investment in secon
d level Indian Investee Company. However, complian
ce has to be ensured as explained under Q 41.
Q.45. After the issue of instructions on Pricing
Guidelines for FDI instruments with optionality cl
auses, in terms of APDIR 86 dated January 9, 2014
, what will be the status of pricing guidelines fo
r FDI instruments without any optionality clauses?
Ans: The extant pricing guidelines shall continue
to be applicable for FDI instruments without any o
ptionality clauses [Plain FDI instruments]. The pr
icing guidelines for FDI instruments with optional
ity clauses in terms of APDIR 86 dated January 9,
2014 provides for pricing at the time of exercise
of exit option only. If the investor, exercises hi
s option during the validity of the optionality cl
ause shall exit only in accordance with the guidel
ines stated in APDIR 86 dated January 9, 2014
Q.46. Will there now be two pricing regimes, one f
or FDI with optionality clauses and one without op
tionality clauses?
Ans: Yes, the instructions, as contained in APDIR
86 dated January 9, 2014, are applicable at the ti
me of exit by non-resident investor from FDI with
optionality agreement. Therefore there will be two
sets of pricing guidelines at the time of exit of
non-resident from FDI. One applicable to plain FD
I instruments and another for FDI with optionality
clause.
The FDI at the time of entry shall continue to be
regulated under existing guidelines. Thus, entry t
ime pricing guidelines shall be the same for FDI w
ith or without optionality.
Q.47. The instructions prescribe that in case of a
listed company, the non-resident investor shall b
e eligible to exit at the market price obtaining o
n recognised stock exchanges. Does it mean that al
l exit from investment in case of a listed company
having FDI with optionality are to happen on the
floor of stock exchange?
Ans: The optionality clause creates an obligation
for the investee to buy the shares from the invest
or at the price prevailing on the stock market at
the relevant time.
Q.48. It has been specified that in case of unlist
ed company, the non-resident investor shall be eli
gible to exit from the investment in equity shares
of the investee company at a price not exceeding
that arrived at on the basis of Return on Equity (
RoE) as per the latest audited balance sheet. What
does it mean? What is the meaning of latest audit
ed balance sheet?
Ans: It means that in case of an unlisted company,
the non-resident investor can exit at a price whi
ch gives annualized return equal to or less than t
he RoE as per latest audited balance sheet.
II. Foreign Technology Collaboration Agreement
Q.49. Whether the payment in terms of foreign tech
nology collaboration agreement' can be made by an
Authorised Dealer (AD) bank?
Ans. Yes, RBI has delegated the powers, to make pa
yments for royalty, lumpsum fee for transfer of te
chnology and payment for use of trademark/brand na
me in terms of the foreign technology collaboratio
n agreement entered by the Indian company with its
foreign partners, to the AD banks subject to comp
liance with the provisions of Foreign Exchange Man
agement (Current Account Transactions) Rules, 2000
. Further, the requirement of registration of the
agreement with the Regional Office of Reserve Bank
of India has also been done away with.
III. Foreign Portfolio Investment
Q.1. What are the regulations regarding Portfolio
Investments by registered Foreign Portfolio Invest
ors (RFPIs)?
Ans. Investment by RFPI registered in accordance w
ith SEBI guidelines including deemed RFPI [erstwhi
le FII, QFI) is permitted. RFPI may include Asset
Management Companies, Pension Funds, Mutual Funds,
and Investment Trusts as Nominee Companies, Incor
porated / Institutional Portfolio Managers or thei
r Power of Attorney holders, University Funds, End
owment Foundations, Charitable Trusts and Charitab
le Societies.
Investment by RFPIs cannot exceed 10 per cent of t
he paid up capital of the Indian company. All RFPI
/FII/QFI taken together cannot acquire more than 2
4 per cent of the paid up capital of an Indian Com
pany.
RFPI can invest in primary issues of Non-Convertib
le Debentures (NCDs)/ bonds only if listing of suc
h bonds / NCDs is committed to be done within 15 d
ays of such investment. In case the NCDs/bonds iss
ued to the SEBI RFPI are not listed within 15 days
of issuance, for any reason, then the RFPI shall
immediately dispose of these bonds/NCDs either by
way of sale to a third party or to the issuer and
the terms of offer to RFPI should contain a clause
that the issuer of such debt securities shall imm
ediately redeem / buyback the said securities from
the RFPI in such an eventuality.
Q.2. Is Indian Investee Company eligible to raise t
he aggregate cap of 24% for RFPI?
Ans. An Indian company can raise the 24 per cent c
eiling to the sectoral cap / statutory ceiling, as
applicable, by passing a resolution by its Board
of Directors followed by passing a Special Resolut
ion to that effect by their General Body. Indian c
ompany raising the aggregate RFPI investment limit
of 24 per cent to the sectoral cap/ statutory lim
it, as applicable to the respective Indian company
, should necessarily intimate the same to the Rese
rve Bank of India, immediately, as hitherto, along
with a Certificate from the Company Secretary sta
ting that all the relevant provisions of the extan
t Foreign Exchange Management Act, 1999 regulation
s and the Foreign Direct Policy, as amended from t
ime to time, have been complied with.
The Indian Company thus raising the aggregate cap
for RFPI investment should inform Reserve Bank of
India, Foreign Exchange Department, Central Office
, Shahid Bhagat Singh Marg, Fort, and Mumbai 40000
1. The intimation should necessarily be accompanie
d by (a) a resolution passed by Board of Directors
of the Company enhancing the FII aggregate cap, (
b) A special Resolution to the effect passed by th
e shareholders of the Company (c) a certificate fr
om the Company Secretary stating that all the rele
vant provisions of the extant Foreign Exchange Man
agement Act, 1999 regulations and the Foreign Dire
ct Policy, as amended from time to time, have been
complied with, (d) a certificate from the Company
Secretary stating that all the resident sharehold
ers of the investee company are owned and control
led by residents.
To avoid inconvenience to the RFPI investors/India
n company, such intimation should be well in advan
ce else RBI shall caution list the company on FII
investment in the company reaching 22% of paid up
capital or paid up capital of each series of conve
rtible debentures issued by the company.
Q.3. What are the regulations regarding Portfolio I
nvestments by NRIs/PIOs?
Ans. Non- Resident Indian (NRIs) and Persons of In
dian Origin (PIOs) can purchase or sell shares/ fu
lly and mandatorily convertible debentures of Indi
an companies on the Stock Exchanges under the Port
folio Investment Scheme. For this purpose, the NRI
/ PIO has to apply to a designated branch of a ban
k, which deals in Portfolio Investment. All sale/
purchase transactions are to be routed through the
designated branch.
An NRI or a PIO can purchase shares up to 5 per ce
nt of the paid up capital of an Indian company. Al
l NRIs/PIOs taken together cannot purchase more th
an 10 per cent of the paid up value of the company.
The sale proceeds of the repatriable investments c
an be credited to the NRE/ NRO, etc. accounts of t
he NRI/ PIO, whereas the sale proceeds of non-repa
triable investment can be credited only to NRO acc
ounts.
The sale of shares will be subject to payment of ap
plicable taxes.
Q.4. Is Indian Investee Company eligible to raise
the aggregate cap of 10% for Portfolio Investments
by SEBI registered NRI/PIO?
Ans. This limit for investment by NRI/PIO under Po
rtfolio investment scheme can be increased by the
Indian company from 10 per cent to 24 per cent by
passing a General Body resolution. Indian company
raising the aggregate NRI investment limit of 10 p
er cent to 24 per cent, should necessarily intimat
e the same immediately to Reserve Bank of India, F
oreign Exchange Department, Central Office, Shahid
Bhagat Singh Marg, Fort, Mumbai 400001. The intim
ation should necessarily be accompanied by (a) a r
esolution passed by Board of Directors of the Comp
any enhancing the FII aggregate cap, (b) A special
Resolution to the effect passed by the shareholde
rs of the Company (c) a certificate from the Compa
ny Secretary stating that all the relevant provisi
ons of the extant Foreign Exchange Management Act,
1999 regulations and the Foreign Direct Policy, a
s amended from time to time, have been complied wi
th, (d) a certificate from the Company Secretary s
tating that all the resident shareholders of the i
nvestee company are owned and controlled by residents
To avoid inconvenience to the company such intimat
ion should be well in advance else RBI shall cauti
on list the company on FII investment in the compa
ny reaching 8% of paid up capital or paid up capit
al of each series of convertible debentures issued
by the company.
Q.5. With Reference to instructions issued for NRI
PIS Scheme in Para. 2 (i) and (ii) of the A. P.
(DIR Series) Circular No. 29 dated August 20, 201
3 - whether RBI will allot separate / new Unique C
ode No. to the Link Office of the AD bank or will
the Current Code No. allocated will continue to be
the Unique Code No.?
Ans. If the AD banks Link Office already has a Co
de No. allotted by RBI, it will continue to be the
Unique Code Number for reporting the transactions
of NRI-PIS to RBI and the bank need not apply for
new code.
Q.6. Can an AD bank debit investment advisory fees
, chartered accountants fees for issue of 15CA/CB
certificates to NRE/NRO PIS account, as the per
missible debit under the head - Any charges on ac
count of sale/purchase of shares or convertible de
bentures under PIS?
Ans. The charges towards investment advisory fees,
chartered accountant fees for issue of 15CA / CB
certificates, etc. related to the transactions of
sale/purchase of shares / debentures under PIS, ma
y be debited to the NRE / NRO PIS accounts.
Q.7. Under FERA 1973, in terms of para. 2 of the A
.D.(M.A. Series) Cir. No. 32 dated November 1, 199
9, powers were delegated to the ADs, to grant perm
issions to the NRIs/OCBs who made portfolio invest
ments through a designated branch of an AD, on rep
atriation or non-repatriation basis. The investmen
t could be made in shares, debentures, Govt. secur
ities (other than bearer securities), treasury bil
ls, units of MFs, etc. Hence, the prescribed forma
t for permission letter for investment on repatria
tion basis viz. RBI-RPC- on repatriation basis [
available at page nos. 37 to 40 of the A.P. (DIR S
eries) Circular No. 29, dated August 20, 2013 on R
BI website] includes a reference to all such inves
tments besides equity shares and convertible deben
tures. Whether the same format is applicable under
FEMA also?
Ans. Under FEMA, the PIS includes investment only
in equity shares and convertible debentures of Ind
ian companies, on repatriation or non-repatriation
basis. Hence, while issuing the approval letter t
o their NRI clients for undertaking investments un
der PIS, the relevant paragraphs in the format of
permission letter viz. RBI-RPC- on repatriation b
asis, will be required to be suitably modified by
the ADs. In this connection, attention of the AD
is also invited to para. 2(iii) of the A.P. (DIR S
eries) Circular No. 29, dated August 20, 2013.
Q.8. Whether the transfer of funds from NRE - PIS
and NRO PIS accounts to NRE /NRO accounts of the
NRI (opened under provisions of Notification No.
FEMA. 5/2000-RB dated May 3, 2000 amended from tim
e to time), is allowed on account of sale/maturity
proceeds of equity shares and convertible debentu
res purchased and sold under Portfolio Investment
Scheme (PIS) through NRE-PIS and NRO PIS accounts?
Ans. It is clarified that NRE-PIS and NRO-PIS are
essentially NRE and NRO accounts respectively and
so designated to keep the portfolio investment rel
ated operations of the account holder segregated f
or facilitating identification and compliance. As
such, there is no prohibition on transfer of any b
alances held in a NRE-PIS account to a NRE account
or in a NRO-PIS account to a NRO account, subject
of course to payment of taxes, if and as applicable.
Q. 9. Whether transfer of funds is allowed from NR
E PIS account of the NRI to his NRO account open
ed under the provisions of Notification No. FEMA.
5/2000-RB dated May 3, 2000, amended from time to
time?
Ans. It is clarified that the transfer of funds on
account of net sale / maturity proceeds of shares
/ debentures (net of all applicable taxes), may b
e allowed by the AD Bank from NRE PIS account of
a NRI to the said NRIs NRO account.
Q.10. Whether transfer of funds is allowed from NR
O PIS account of the NRI to his NRE account open
ed under the provisions of Notification No. FEMA.5
/2000-RB dated May 3, 2000, amended from time to t
ime?
Ans. It is clarified that the transfer of funds on
account of net sale / maturity proceeds (net of a
ll applicable taxes), of shares / debentures may b
e allowed by the AD Bank from NRO PIS account of
a NRI to the said NRIs NRE account, subject to t
he following conditions :-
such transfer of funds should be within the overal
l ceiling of USD one million per financial year;
subject to payment of tax, as applicable (i.e. as
applicable if funds were remitted abroad); and
The AD should ensure the compliance with the limit
of USD one million for transfer of funds by the N
RI.
IV. Investment in other securities
Q.1. Can a Non-resident Indian (NRI) and SEBI regi
stered Foreign Institutional Investor (FII)invest
in Government Securities/ Treasury bills and Corpo
rate debt?
Ans. Under the FEMA Regulations, only NRIs andSEBI
registered FIIs are permitted to purchase Governm
ent Securities/Treasury bills and Corporate debt.
The details are as under:
A. A Non-resident Indian can purchase without limit
,
(1) on repatriation basis
i) Dated Government securities (other than bearer
securities) or treasury bills or units of domestic
mutual funds;
ii) Bonds issued by a public sector undertaking (PS
U) in India; and
iii) Shares in Public Sector Enterprises being disi
nvested by the Government of India.
(2) on non-repatriation basis
i) Dated Government securities (other than bearer
securities) or treasury bills or units of domestic
mutual funds;
ii) Units of Money Market Mutual Funds in India; an
d
iii) National Plan/Savings Certificates.
B. A SEBI registered FII may purchase, on repatria
tion basis, dated Government securities/ treasury
bills, listed non-convertible debentures/ bonds is
sued by an Indian company and units of domestic mu
tual funds either directly from the issuer of such
securities or through a registered stock broker o
n a recognised stock exchange in India.
Purchase of debt instruments including Upper Tier
II instruments issued by banks in India and denomi
nated in Indian Rupees by FIIs are subject to limi
ts notified by SEBI and the Reserve Bank from time
to time. The present limit for investment in Corp
orate Debt Instruments like non-convertible debent
ures / bonds by RFPI/FII/QFI and long term investo
rs is USD 51 billion, out of which a sub-limit upt
o USD 2 billion is for Commercial Papers.
The present limit of investment by RFPI/FII/QFI an
d long term investors in Government Securities of
residual maturity of more than one year is USD 30
billion out of which a sub-limit of USD 10 billion
is available to long term investors registered wi
th SEBI (Sovereign Wealth Funds (SWFs), Multilater
al agencies, endowment funds, insurance funds, pen
sion funds and foreign Central Banks).
Q.2. Can a NRI and SEBI registered FII invest in T
ier I and Tier II instruments issued by banks in I
ndia?
Ans. RFPI and NRIs have been permitted to subscrib
e to the Perpetual Debt instruments (eligible for
inclusion as Tier I capital) and Debt Capital inst
ruments (eligible for inclusion as upper Tier II c
apital), issued by banks in India and denominated
in Indian Rupees, subject to the following conditi
ons:
Investment by all RFPI in Rupee denominated Perpet
ual Debt instruments (Tier I) should not exceed an
aggregate ceiling of 49 per cent of each issue an
d investment by individual FII should not exceed t
he limit of 10 per cent of each issue.
Investments by all NRIs in Rupee denominated Perpe
tual Debt instruments (Tier I) should not exceed a
n aggregate ceiling of 24 per cent of each issue a
nd investments by a single NRI should not exceed 5
percent of each issue.
Investment by RFPIs in Rupee denominated Debt Capi
tal instruments (Tier II) shall be within the limi
ts stipulated by SEBI for RFPI/FII/QFI investment
in corporate debt instruments.
Investment by NRIs in Rupee denominated Debt Capit
al instruments (Tier II) shall be in accordance wi
th the extant policy for investment by NRIs in oth
er debt instruments.
Investment by RFPIs in Rupee denominated Upper Tie
r II Instruments raised in Indian Rupees will be w
ithin the limit prescribed by the SEBI for investm
ent in corporate debt instruments.
The details of the secondary market sales / purcha
ses by RFPIs and the NRIs in these instruments on
the floor of the stock exchange are to be reported
by the custodians and designated Authorised Deale
r banks respectively, to the Reserve Bank through
the soft copy of the Forms LEC (FII) and LEC (NRI).
Q.3. Can a NRI and RFPI invest in Indian Depository
Receipts (IDRs)?
Ans. NRI and RFPIs have been permitted to invest,
purchase, hold and transfer IDRs of eligible compa
nies resident outside India and issued in the Indi
an capital market, subject to the following condit
ions:
(i) The purchase, hold and transfer of IDRs is in
accordance with the Foreign Exchange Management (T
ransfer or Issue of Security by a Person Resident
Outside India) Regulations, 2000 notified vide Not
ification No. FEMA 20 / 2000-RB dated May 3, 2000,
as amended from time to time.
A limited two way fungibility for IDRs (similar to
the limited two way fungibility facility availabl
e for ADRs/GDRs) subject to the following terms an
d conditions:
The conversion of IDRs into underlying equity shar
es would be governed by the conditions mentioned i
n paras 6 and 7 of A.P. (DIR Series) Circular No.
5 dated July 22, 2009.
Fresh IDRs would continue to be issued in terms of
the provisions of A.P. (DIR Series) Circular No.
5 dated July 22, 2009.
The re-issuance of IDRs would be allowed only to t
he extent of IDRs that have been redeemed /convert
ed into underlying shares and sold.
There would be an overall cap of USD 5 billion for
raising of capital by issuance of IDRs by eligibl
e foreign companies in Indian markets. This cap wo
uld be akin to the caps imposed for FII investment
in debt securities and would be monitored by SEBI.
IDRs shall not be redeemable into underlying equit
y shares before the expiry of one year period from
the date of issue of the IDRs.
At the time of redemption / conversion of IDRs int
o the underlying shares, the Indian holders (perso
ns resident in India) of IDRs shall comply with th
e provisions of the Foreign Exchange Management (T
ransfer or Issue of Any Foreign Security) Regulati
ons, 2004 notified vide Notification No. FEMA 120
/ RB-2004 dated July 7 2004, as amended from time
to time.
The FEMA provisions shall not apply to the holding
of the underlying shares, on redemption of IDRs b
y the FIIs including SEBI approved sub-accounts of
the FIIs and NRIs. The issuance, redemption and f
ungibility of IDRs would also be subject to the SE
BI (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended from time to time as
well as other relevant guidelines issued in this
regard by the Government, the SEBI and the RBI fro
m time to time.
Q.4. Can a person resident in India invests in the
Indian Depository Receipts (IDRs)? What is the pr
ocedure for redemption of IDRs held by persons res
ident in India?
Ans. A person resident in India may purchase, hold
and transfer IDRs of eligible companies resident
outside India and issued in the Indian capital mar
ket. The FEMA Regulations shall not be applicable
to persons resident in India as defined under sect
ion 2(v) of FEMA, 1999, for investing in IDRs and
subsequent transfer arising out of a transaction o
n a recognized Stock Exchange in India. However, a
t the time of redemption / conversion of IDRs into
underlying shares, the Indian holders (persons re
sident in India) of IDRs shall comply with the pro
visions of the Foreign Exchange Management (Transf
er or Issue of Any Foreign Security) Regulations,
2004 notified vide Notification No. FEMA 120 / RB-
2004 dated July 7 2004, as amended from time to ti
me. The following guidelines shall be followed on
redemption of IDRs by persons resident in India:
i. Listed Indian companies may either sell or cont
inue to hold the underlying shares subject to the
terms and conditions as per Regulations 6B and 7 o
f Notification No. FEMA 120/RB-2004 dated July 7,
2004, as amended from time to time.
ii. Indian Mutual Funds, registered with SEBI may
either sell or continue to hold the underlying sha
res subject to the terms and conditions as per Reg
ulation 6C of Notification No. FEMA 120/RB-2004 da
ted July 7, 2004, as amended from time to time.
iii. Other persons resident in India including res
ident individuals are allowed to hold the underlyi
ng shares only for the purpose of sale within a pe
riod of 30 days from the date of conversion of the
IDRs into underlying shares.
V. Foreign Venture Capital Investment
What are the regulations for Foreign Venture Capita
l Investment?
Ans.
A SEBI registered Foreign Venture Capital Investor
has general permission from the Reserve Bank of I
ndia to invest in a Venture Capital Fund (VCF) or
an Indian Venture Capital Undertaking (IVCU), in t
he manner and subject to the terms and conditions
specified in Schedule 6 of RBI Notification No. FE
MA 20/2000-RB dated May 3, 2000, as amended from t
ime to time. These investments by SEBI registered
FVCI, would be subject to the SEBI regulation and
sector specific caps of FDI.
FVCIs can purchase equity / equity linked instrume
nts / debt / debt instruments, debentures of an IV
CU or of a VCF through initial public offer or pri
vate placement in units of schemes / funds set up
by a VCF. At the time of granting approval, the Re
serve Bank permits the FVCI to open a Foreign Curr
ency Account and/ or a Rupee Account with a design
ated branch of an AD Category I bank.
FVCIs allowed to invest in the eligible securities
(equity, equity linked instruments, debt, debt in
struments, debentures of an IVCU or VCF, units of
schemes / funds set up by a VCF) by way of private
arrangement / purchase from a third party also. F
VCIs are also allowed to invest in securities on a
recognized stock exchange.
The purchase / sale of shares, debentures and unit
s can be at a price that is mutually acceptable to
the buyer and the seller.
AD Category I banks can offer forward cover to F
VCIs to the extent of total inward remittance. In
case the FVCI has made any remittance by liquidati
ng some investments, original cost of the investme
nts has to be deducted from the eligible cover to
arrive at the actual cover that can be offered.
VI. Investment by QFIs
Q.1. What are QFIs and what are the investments the
y can undertake?
Ans: QFIs mean a person who fulfils the following c
riteria:
(a) Resident in a country that is a member of Fina
ncial Action task Force (FATF) or a member of a gr
oup which is a member of FATF; and
(b) Resident in a country that is a signatory to I
OSCOs MMoU (Appendix A Signatories) or a signator
y of a bilateral MoU with SEBI
PROVIDED that the person is not resident in a coun
try listed in the public statements issued by FATF
from time to time on jurisdictions having a strat
egic AML/CFT deficiencies to which counter measure
s apply or that have not made sufficient progress
in addressing the deficiencies or have not committ
ed to an action plan developed with the FATF to ad
dress the deficiencies;
Further such person is not resident in India and i
s not registered with SEBI as a Foreign Institutio
nal Investor (FII) or Sub-Account of an FII or For
eign Venture Capital Investor (FVCI).
Explanation:
bilateral MoU with SEBI shall mean a bilateral M
oU between SEBI and the overseas regulator that, i
nter alia, provides for information sharing arrang
ements.
Member of FATF shall not mean an associate member o
f FATF.
Q.2. What are the investments QFIs can undertake a
nd what are the applicable caps for such investmen
t?
Ans: QFIs are now being treated as deemed RFPI and
rules as applicable to RFPIs shall be applicable.
Q.3. What are the reporting requirements for acqui
sition/transfer of shares by non-residents under r
espective schedules to FEMA 20:
Ans: Following are the reporting requirements
(A) Reporting of FDI for fresh issuance of shares
(i) Reporting of inflow
(a) The actual inflows on account of such issuance
of shares shall be reported by the AD branch in t
he R-returns in the normal course.
(b) An Indian company receiving investment from ou
tside India for issuing shares / convertible deben
tures / preference shares under the FDI Scheme, sh
ould report the details of the amount of considera
tion to the Regional Office concerned of the Reser
ve Bank through its AD Category I bank, not later
than 30 days from the date of receipt in the Adva
nce Reporting Form enclosed in Annex - 6. Noncompl
iance with the above provision would be reckoned a
s a contravention under FEMA, 1999 and could attra
ct penal provisions.
The Form can also be downloaded from the Reserve Ba
nk's website
http://www.rbi.org.in/Scripts/BS_ViewFemaForms.aspx
(c) Indian companies are required to report the de
tails of the receipt of the amount of consideratio
n for issue of shares / convertible debentures, th
rough an AD Category - I bank, together with a cop
y/ies of the FIRC/s evidencing the receipt of the
remittance along with the KYC report on the non-re
sident investor from the overseas bank remitting t
he amount. The report would be acknowledged by the
Regional Office concerned, which will allot a Uni
que Identification Number (UIN) for the amount rep
orted.
(ii) Time frame within which shares have to be issu
ed
The equity instruments should be issued within 180
days from the date of receipt of the inward remit
tance or by debit to the NRE/FCNR (B) /Escrow acco
unt of the non-resident investor. In case, the equ
ity instruments are not issued within 180 days fro
m the date of receipt of the inward remittance or
date of debit to the NRE/FCNR (B) account, the amo
unt of consideration so received should be refunde
d immediately to the non-resident investor by outw
ard remittance through normal banking channels or
by credit to the NRE/FCNR (B)/Escrow account, as t
he case may be. Non-compliance with the above prov
ision would be reckoned as a contravention under F
EMA and could attract penal provisions. In excepti
onal cases, refund / allotment of shares for the a
mount of consideration outstanding beyond a period
of 180 days from the date of receipt may be consi
dered by the Reserve Bank, on the merits of the case.
(iii) Reporting of issue of shares
(a) After issue of shares (including bonus and sha
res issued on rights basis and shares issued on co
nversion of stock option under ESOP scheme)/ conve
rtible debentures / convertible preference shares,
the Indian company has to file Form FC-GPR, throu
gh its AD Category I bank, not later than 30 days
from the date of issue of shares. The Form can als
o be downloaded from the Reserve Bank's website ht
tp://www.rbi.org.in/Scripts/BS_ViewFemaForms.aspx
Non-compliance with the above provision would be r
eckoned as a contravention under FEMA and could at
tract penal provisions.
(b) Form FC-GPR has to be duly filled up and signe
d by Managing Director/Director/Secretary of the C
ompany and submitted to the Authorised Dealer of t
he company, who will forward it to the concerned R
egional Office of the Reserve Bank. The following
documents have to be submitted along with Form FC-
GPR:
(i) A certificate from the Company Secretary of the
company certifying that :
a) all the requirements of the Companies Act, 1956
have been complied with;
b) terms and conditions of the Governments approva
l, if any, have been complied with;
c) the company is eligible to issue shares under th
ese Regulations; and
d) the company has all original certificates issue
d by AD banks in India evidencing receipt of amoun
t of consideration.
(ii) A certificate from SEBI registered Merchant B
anker or Chartered Accountant indicating the manne
r of arriving at the price of the shares issued to
the persons resident outside India.
(c) The report of receipt of consideration as well
as Form FC-GPR have to be submitted by the AD ban
k to the Regional Office concerned of the Reserve
Bank under whose jurisdiction the registered offic
e of the company is situated.
d) Issue of bonus/rights shares or shares on conve
rsion of stock options issued under ESOP to person
s resident outside India directly or on amalgamati
on / merger with an existing Indian company, as we
ll as issue of shares on conversion of ECB / royal
ty / lumpsum technical know-how fee / import of ca
pital goods by units in SEZs has to be reported in
Form FC-GPR.
B. Reporting of FDI for Transfer of shares route
(i) The actual inflows and outflows on account of
such transfer of shares shall be reported by the A
D branch in the R-returns in the normal course.
(ii) Reporting of transfer of shares between resid
ents and non-residents and vice- versa is to be ma
de in Form FC-TRS. The Form FC-TRS should be submi
tted to the AD Category I bank, within 60 days f
rom the date of receipt of the amount of considera
tion. The onus of submission of the Form FC-TRS wi
thin the given timeframe would be on the transfero
r / transferee, resident in India.
(iii) The sale consideration in respect of equity
instruments purchased by a person resident outside
India, remitted into India through normal banking
channels, shall be subjected to a KYC check (Anne
x 9-ii) by the remittance receiving AD Category
I bank at the time of receipt of funds. In case, t
he remittance receiving AD Category I bank is di
fferent from the AD Category - I bank handling the
transfer transaction, the KYC check should be car
ried out by the remittance receiving bank and the
KYC report be submitted by the customer to the AD
Category I bank carrying out the transaction alo
ng with the Form FC-TRS.
(iv) The AD bank should scrutinise the transaction
s and on being satisfied about the transactions sh
ould certify the form FC-TRS as being in order.
(v) The AD bank branch should submit two copies of
the Form FC-TRS received from their constituents/
customers together with the statement of inflows/o
utflows on account of remittances received/made in
connection with transfer of shares, by way of sal
e, to IBD/FED/or the nodal office designated for t
he purpose by the bank in the proforma (which is t
o be prepared in MS-Excel format). The IBD/FED or
the nodal office of the bank will consolidate repo
rting in respect of all the transactions reported
by their branches into two statements inflow and o
utflow statement. These statements (inflow and out
flow) should be forwarded on a monthly basis to Fo
reign Exchange Department, Reserve Bank, Foreign I
nvestment Division, Central Office, Mumbai in soft
copy (in MS- Excel) by e-mail. The bank should ma
intain the FC-TRS forms with it and should not for
ward the same to the Reserve Bank of India.
(vi) The transferee/his duly appointed agent shoul
d approach the investee company to record the tran
sfer in their books along with the certificate in
the Form FC-TRS from the AD branch that the remitt
ances have been received by the transferor/payment
has been made by the transferee. On receipt of th
e certificate from the AD, the company may record
the transfer in its books.
(vii) On receipt of statements from the AD bank ,
the Reserve Bank may call for such additional deta
ils or give such directions as required from the t
ransferor/transferee or their agents, if need be.
C. Reporting of conversion of ECB into equity
Details of issue of shares against conversion of E
CB have to be reported to the Regional Office conc
erned of the Reserve Bank, as indicated below:
In case of full conversion of ECB into equity, the
company shall report the conversion in Form FC-GP
R to the Regional Office concerned of the Reserve
Bank as well as in Form ECB-2 to the Department of
Statistics and Information Management (DSIM), Res
erve Bank of India, Bandra-Kurla Complex, Mumbai
400 051, within seven working days from the close
of month to which it relates. The words "ECB whol
ly converted to equity" shall be clearly indicated
on top of the Form ECB-2. Once reported, filing o
f Form ECB-2 in the subsequent months is not neces
sary.
In case of partial conversion of ECB, the company
shall report the converted portion in Form FC-GPR
to the Regional Office concerned as well as in For
m ECB-2 clearly differentiating the converted port
ion from the non-converted portion. The words "ECB
partially converted to equity" shall be indicated
on top of the Form ECB-2. In the subsequent month
s, the outstanding balance of ECB shall be reporte
d in Form ECB-2 to DSIM.
The SEZ unit issuing equity as mentioned in para (
iii) above, should report the particulars of the s
hares issued in the Form FC-GPR.
D. Reporting of ESOPs for allotment of equity share
s
The issuing company is required to report the deta
ils of issuance of ESOPs to its employees to the R
egional Office concerned of the Reserve Bank, in p
lain paper reporting, within 30 days from the date
of issue of ESOPs. Further, at the time of conver
sion of options into shares the Indian company has
to ensure reporting to the Regional Office concer
ned of the Reserve Bank in form FC-GPR, within 30
days of allotment of such shares. However, provisi
on with regard to advance reporting would not be a
pplicable for such issuances.
E. Reporting of ADR/GDR Issues
The Indian company issuing ADRs / GDRs has to furn
ish to the Reserve Bank, full details of such issu
e in the Form enclosed in Annex -10, within 30 day
s from the date of closing of the issue. The compa
ny should also furnish a quarterly return in the p
rescribed Form, to the Reserve Bank within 15 days
of the close of the calendar quarter. The quarter
ly return has to be submitted till the entire amou
nt raised through ADR/GDR mechanism is either repa
triated to India or utilized abroad as per the ext
ant Reserve Bank guidelines.
F. Reporting of RFPI investments under PIS scheme
(i) RFPI reporting: The AD Category I banks have
to ensure that the RFPI who are purchasing variou
s securities (except derivative and IDRs) by debit
to the Special Non-Resident Rupee Account should
report all such transactions details (except deriv
ative and IDRs) in the Form LEC to Foreign Exchang
e Department, Reserve Bank of India, Central Offic
e by uploading the same to the ORFS web site (http
s://secweb.rbi.org.in/ORFSMainWeb/Login.jsp). It w
ould be the banks responsibility to ensure that th
e data submitted to RBI is reconciled by periodica
lly taking a FII holding report for their bank.
(iii) The Indian company which has issued shares t
o FIIs under the FDI Scheme (for which the payment
has been received directly into companys account
) and the Portfolio Investment Scheme (for which t
he payment has been received from FIIs' account ma
intained with an AD Category I bank in India) sh
ould report these figures separately under item no
. 5 of Form FC-GPR (Annex - 8) (Post-issue pattern
of shareholding) so that the details could be sui
tably reconciled for statistical / monitoring purp
oses.
G. Reporting of NRI investments under PIS scheme
The link office of the designated branch of an AD
Category I bank shall furnish to the Reserve Ban
k18, a report on a daily basis on PIS transactions
undertaken by it, on behalf of NRIs. This report
can be furnished on a floppy to the Reserve Bank a
nd also uploaded directly on the ORFS web site (ht
tps://secweb.rbi.org.in/ORFSMainWeb/Login.jsp). It
would be the banks responsibility to ensure that
the data submitted to RBI is reconciled by periodi
cally taking a NRI holding report for their bank.
H. Reporting of foreign investment by way of issue
/ transfer of participating interest/right in o
il fields:
Foreign investment by way of issue / transfer of
participating interest/right in oil fields by Ind
ian companies to a non resident would be treated a
s an FDI transaction under the extant FDI policy a
nd the FEMA regulations. Accordingly, transfer of
participating interest/ rights will be reported
as other category under Para 7 of revised Form F
C-TRS and issuance of participating interest/ rig
hts will be reported as other category of instr
uments under Para 4 of Form FCGPR.