India - Amendments To The FEMA (Non-Debt Instruments) Rules, 2019.
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13 May, 2020
The Ministry of Finance has, by way of notification dated April 27, 2020, amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘FEMA NDI Rules’) with effect from the date of the notification. The key amendments brought about by the amendment are set out below.
1. Acquisition of Securities in a Rights Issue by way of Renouncement: Rule 7 of the FEMA NDI Rules, which deals with acquisition of equity instruments (other than warrants) by a person resident outside India in case of a rights issue or bonus issue by an Indian company, inter-alia, provides that in case of an unlisted Indian company, the rights issue to persons resident outside India will not be at a price less than the price offered to persons resident in India and in case of a listed company, the rights issue to persons resident outside India will be at a price determined by the company, and the general pricing guidelines will not apply. The FEMA NDI Rules also contained an explanation that provisions of Rule 7 will also apply in case of subscription to rights shares by a person resident outside India which were renounced by the person to whom they were originally offered.
Pursuant to the amendment, the above explanation to Rule 7 has been deleted and a new rule, Rule 7A, has been inserted which provides that the pricing guidelines specified under the FEMA NDI Rules will apply to the subscription of shares where a person resident outside India acquires rights shares that were originally offered to a person resident in India and were subsequently renounced.
2. Single Brand Retail Trading: As per the FEMA NDI Rules, foreign investment in an entity engaged in single brand retail trading (‘SBRT’) is permitted up to 100% under the automatic route. The FEMA NDI Rules stipulate that for proposals involving foreign investment beyond 51% in an entity engaged in SBRT, 30% of the goods procured need to be sourced from India, and such procurement requirement is to be met for the first time as an average of 5 years’ total value of goods procured beginning 1stApril of the year of the commencement of SBRT business (i.e. opening of first store or start of online retail, whichever is earlier) and annually thereafter.
However, these sourcing norms were not applicable for 3 years from commencement of business (i.e. ‘opening of first store’) for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting-edge’ technology. The amendment now clarify that the exemption will not apply for 3 years from the earlier of opening of first store or commencement of online retail.
3. Insurance Intermediaries: The Government of India had, by way of Press Note 1 of 2020 dated February 21, 2020, approved changes in the foreign direct investment policy for insurance intermediaries. The Government had permitted 100% foreign direct investment in insurance intermediaries under the automatic route, subject to certain conditions. These changes have now taken effect from the date of amendment to the FEM NDI Rules i.e. April 27, 2020. Please refer to our client alert dated March 30, 2020 (accessible here) for a summary of the changes brought about by Press Note 1 of 2020.
4. Conditions for Divestment by FPIs / Reclassification of Investment: The FEMA NDI Rules prescribe the manner of divestment by a foreign portfolio investor (‘FPI’) if the FPI invests beyond the prescribed limits and that if the FPI choses not to divest, its entire investment in the company will be treated as foreign direct investment. The amendment adds an additional condition that the aforesaid divestment and/or reclassification will be subject to further conditions, if any, as may be specified by Securities and Exchange Board of India and the Reserve Bank of India.
For further information, please contact:
Zia Mody, Partner, AZB & Partners