New Foreign Investment Regime – Additional Clarifications

The Central Government, vide notification dated 17 October 2019 had notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) in supersession of the Foreign Exchange Management (Transfer  and Issue of Security by a Person Resident outside India) Regulations, 2017 (Old FEMA 20) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.

Now, the Ministry of Finance, Department of Economic Affairs, vide its notification dated 5 December 2019 has further amended the NDI Rules (NDI Amendment Rules). As expected, majority of the revisions brought in the NDI Amendment Rules are of clarificatory nature and have been implemented retrospectively from 17 October 2019 (i.e. the date of implementation of the NDI Rules). Certain amendments however have been implemented prospectively from 5 December 2019 (i.e. the date of notification of the NDI Amendment Rules).

A Summary of the amendments notified with ‘retrospective effect’ is set out below:

Amendments in definitions

NDI Amendment Rules now bring expected clarity on key definitions of sectoral cap and investment vehicle. Now the word ‘debt’ included in the ambit and definition of sectoral cap has been removed. Moreover, mutual funds regulated by SEBI have now been excluded from the definition of investment vehicle. The key changes to definitions are:

Amendments related to gift of shares

Clarification on conversion price / formula

Going back to the original position of Old FEMA 20, it has now been clarified that the price / conversion formula of convertible equity instruments need to be determined upfront at the time of issue of convertible equity instruments. Further, the price at the time of conversion should not be lower than the fair value worked out at the time of issuance of the convertible equity instruments.

A Summary of the amendments notified with ‘prospective effect’ is set out below:

Sectoral Changes

Comment

Since the NDI Rules did not incorporate amendments implemented through Press Note 4, there was confusion on the regulators’ position. Therefore, NDI Amendment Rules are indeed welcome as they provide much needed clarity on the discrepancies between the NDI Rules and the existing position under the extant regulations.

On the other hand, however, the questions like what constitutes ‘digital media’ still remain unanswered. Complete clarity on these aspects would have been a welcome step.

-        Moin Ladha (Partner) and Parag Bhide (Principal Associate)

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