Issue of Securities: A view into the new FDI Regime
To any Nonresident investor looking into an opportunity to invest in India, one of the main concerns is the time and process required to set up a private company or other legal entity in India and how simple / difficult it is to get various registrations/approvals under the different law, if any, and the applicable law of the country. Indian Government had been promptly involved for the past few years to improve India’s ranking in ease of doing business and has attained remarkable success in doing so. The Indian Government has worked well to bring down the time taken for incorporating/registration of a company in India. It lunched steps called integrated incorporation e-form called SPICe. Various e-forms such as the Name Application form (RUN), the DIN (Director Identification Form) Application form for the proposed directors, the Incorporation form and the e-PAN and e-TAN application (PAN and TAN are registrations required under Income Tax, Act) have been merged into a single form. Such an integrated form SPICEe has saved the time taken to properly register a company from max 30-40 days to a total of 3 – 4 days.
With the simplification of the registration process, the first concern, i.e. the time taken to the registration of a company in India has been effectively dealt with. The next step of changes has been introduced to deal with the complication in the compliance laws prevalent in India. In a bid to simplify the existing compliances related to the Foreign Direct Investment (FDI), the Indian Government came out with important notification (Notification No. FEMA 20(R)/ 2017-RB) dated November 07, 2017, which seeks to overhaul regulations to regulate Foreign Direct Investment in India by a non resident person. The Regulations are Foreign Exchange Management (FEMA) (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 [hereinafter referred to as NEW FDI Regulations].
We have covered the many changes instituted in the NEW Foreign Direct Investment Regulations in a series of blogs. The first blog is related to the simplification of the issue of securities to a person resident outside India. The existing Foreign Exchange Management Act and the Companies Act 2013 were not on par with each other. The disconnect was associated to the time limit for allotment of securities, treatment of expenses made for registration a new entity in India, issue of securities to Nonresident individuals (NRIs) and its later reporting and the effect of delay in reporting of the compliances mentioned under the Foreign Exchange Management Act (FEMA). The changes initiated have been listed out below as follows:
- Issue of Securities:
There was a discrepancy in the time limit related to the allotment of securities under the FEMA and the Companies Act, 2013. The earlier Foreign Direct Investment (FDI) rule gave a time of 180 days to allot the securities from the date of receipt of consideration. However, under the Companies Act, 2013 it is mandatory that the securities be allotted within 60 days from the date of receipt of consideration. This inconsistency among the two Regulations caused many difficulties as the Companies were not clear if they get additional time to allot securities in cases of Foreign Direct Investment (FDI). This irregularity has been removed by the RBI and the New Foreign Direct Investment (FDI) Regulations have now been aligned with that of Companies Act, 2013 (60 days).
- Issue of Capital Instruments against Pre-incorporation expenses:
Pre-incorporation expenses are those expenses incurred by founders/promoters on account of Government and professional fees paid to the consultant prior to registration. The New Foreign Direct Investment (FDI) Regulations has covered by way of issue of Capital Instruments against pre-incorporation expenses of the Wholly Owned Subsidiaries registration in India by a Non-Resident Entity working in a zone where 100 % Foreign Direct Investment (FDI) is allowed. Investment in almost all the sectors is under 100% automatic route except for some sectors like retail, real estate, defense, etc. Terms & Condition specified by RBI for the same are as follows:
- Capital Instruments to be issued up to a limit of 5 % of the Authorized Capital or USD 5,00,000, whichever is less.
- Reporting to be made to RBI in the form prescribed FC-GPR within:
· Thirty days from the date of issue of capital instruments
· But not later than 1-year from the date of incorporation
A Certificate from the Statutory Auditor of the Company to be submitted along with form FC-GPR stating that the pre-incorporation expenses in favor of which the capital instruments have been issued have been utilized for the purpose for which it was received.
Please note that Form FC-GPR has been integrated into Single Master Form (SMF) w.e.f. 1st September 2018. To read more about the same, please go to Single Master Form (SMF) And The New Filing Platform FIRMS.
- Streamlining of Issue of shares through Rights Issue and Bonus Issue:
The New Foreign Direct Investment (FDI) Regulations have streamlined the issue of shares under the rights issue and bonus issue. One important change lunched is that the right shares can now be renounced by Nonresident in favor of another Nonresident. Such renunciation of the right shares was not possible in the earlier rule. This outcome will much comfort in issuing shares through a rights issue to a person resident outside India (in whose favor the rights have been renounced), even if he is not an existing shareholder. Please note that if the security is issued as preferential issue / private placement, a strict procedure needs to comply under the Companies Act, 2013 (unlike rights issue).
- Capital instruments being issued on a repatriable or non-repatriable basis to NRIs:
There was some puzzle in the Foreign Direct Investment (FDI) rule prior to the issue of 2017 Regulations, on dealings with the shares issued on the repatriable basis and on the non-repatriable basis to an NRIs. This puzzle has been solved now by clearly stating that securities issued on the non-repatriation basis to NRIs are treated as domestic investment and therefore, no Foreign Exchange Management Act (FEMA) compliances are needed.
- Delays in Reporting:
Under the previous Foreign Direct Investment (FDI) rule, if the Companies failed to report Foreign Direct Investment (FDI) transactions within the limited time specified, they had to go for compounding of the offenses, unless condoned (offense being the delay in reporting). Foreign Direct Investment (FDI) involves togetherness with the authorized dealer bank and the remitter bank. It also includes compliances under other Regulations, like Companies Act. Many Companies could not able to report on time under FEMA. However, the Reserve Bank of India, taking a liberal view on such procedural lapses in line with the provisions of the Companies Act, 2013. Instances of delay in such reporting shall be regularized (without having to go for compounding) subject to payment of late fees.