Legal Compliance for Foreign Investors in India Focusing on FPIs – 2020
Introduction
Foreign Direct Investment (FDI) is an important monetary source and primarily involves investments being made by an individual or by a business vehicle in one country into business interests located in another country. It takes place when a corporate personality acquires control or ownership through establishing foreign business operations or through obtaining foreign assets. It opens the scope of foreign investors to appropriately invest money in a country and is a fundamental principle of economic liberalization.
RBI has relied on the definition of FDI as ‘investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company’. Further, under 2(XVIII) of TISPRO regulations, foreign investment has been defined as ‘any investment made by a person resident outside India on a repatriable basis in capital instruments of any Indian company or to the capital of an LLP’. Also, Foreign Portfolio Investment is defined as ‘any investment made by a person resident outside India in capital instruments where such investment is (a) less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company or (b) less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company’.
FDI in India has two entry routes that are Automatic route and Government Approved Route. The former route is an uncomplicated and easily accessible mode where no prior permission of Government is required while in the other route, an investor has to file an application through Foreign Investment Facilitation Portal and the approval of government is a sine qua non. Sectors/ Sub-sectors have been classified according to the routes to ease the complication for foreign investors. Also, there is an exception to the Automatic route for any investment by a person who is a citizen of Pakistan or Bangladesh or an entity incorporated in these countries as they have to take the prior consent of the GOI in any sector which is not prohibited.
Before May of 2017, Foreign investment promotion board (FIPB) had the subject matter in regard to approval or rejection of application under Government route but now it has been substituted with (FIFP) that is Foreign investment Facilitation Portal administered by Department of Industrial Policy and Promotion (DIPP) which acts as a single-window interface to review and grant approval to FDI proposals. The rationale behind the change is to speed up the FDI inflow clearance and to increase the transparency in the FDI approvals. By abolishing the inter-ministerial body (FIPB), now individual government departments have been empowered to clear FDI proposals by consulting with DIPP following the Standard Operating Procedures issued for processing applications.
At the same time, FDI is a capital account transaction that is always under the eyes of watchdogs. Violation of any regulation can invite the stringent penal provisions inscribed under FEMA that is regulated by RBI. An investigation can be carried out by the ED if it finds or has reasonable reason to doubt that there has been a violation of rules. Any FDI proposal has to be guided by FEMA, TISPRO regulations, FDI policy, and any other applicable law or regulations. In addition to that, any FDI through both the modes has to be compulsorily required to report to the RBI as it is the nodal authority that has the specified task to deal with foreign exchange.
Relaxation of Norms in 2019
Seeing the complexities faced by the foreign investor as well as the lack of proper growth rate in foreign portfolio investment (FPI), a SEBI-constituted panel (H.R. Khan Panel) was created to look into shortcomings that were resulting into such deficit problems. The recommendations were made proposing significant changes in the rules that is used to govern FPI. The recommendations revolved around liberalizing the norms as well as increasing the simplification of procedure. In August 2019, key recommendations were brought into force and the FPI regulations were redrafted following recommendations made by the panel and notified the consolidated operational guidelines for FPIs, Designated Depository Participants (DDPs) and Eligible Foreign Investors (EFIs) issued to facilitate the implementation of SEBI (Foreign Portfolio Investors) Regulations, 2019. The major changes are as follows-
Recategorization of FPIs
The broad-based criteria has been obliterated which required at least 20 investors with no investor holding more than forty-nine percent of the shares or units of the fund. In addition to that, the major change that has been introduced is doing away with the third category and re-categorizing FPIs in only two categories. All existing FPIs registered as Category I FPIs under the SEBI (Foreign Portfolio Investors) Regulations, 2014 shall be deemed to have been registered as Category I FPIs under the Regulations. Secondly, all existing FPIs registered as Category III FPIs under the 2014 Regulations shall be deemed to have been registered as Category II FPIs under the Regulations. Likewise, there will be no deemed re-categorization of registration for eligible entities from Category III FPI registration under the 2014 Regulations to Category I FPI under the Regulations. All existing FPIs registered as Category II FPIs under the 2014 Regulations shall be deemed to have been registered either as Category I FPI or Category II FPI under the Regulations, depending on the eligibility criteria met by such FPIs under the Regulations. Insurance entities and appropriately regulated broad-based funds domiciled in Financial Action Task Force (FATF) member countries shall be deemed to be Category I FPIs, while funds from non-FATF member countries shall be deemed to be Category II FPIs is one of the major change brought through re-categorization.
Simplification of KYC requirements
The requirement of Documents to fulfil the criterion of KYC has been simplified and less onerous. A table has been given in the operational guidelines issued by the SEBI that covers the list of documents required for both categories; Category I and Category II. FPIs have to submit the documents according to their category. Relaxation can be observed in the cases of KYC documents like address proof and board resolution, where a Power of Attorney granted to the custodian can be submitted now. Also, an online pan update or e-pan is acceptable. Further, once the KYC is completed, the intermediary will now be able to upload the Form and supporting documents directly on the KRA (KYC Registration Agency) portal for other market intermediaries to access and complete their KYC requirements reducing the burden on portfolio investor.
Removing the restriction on Opaque Structure
Earlier the foreign funds having an opaque structure or segregated portfolios cannot register as FPIs but now the restriction has been removed and now the fund includes sub-funds or separate classes of shares or equivalent structure with segregated portfolio for such sub-funds or separate classes of shares or equivalent structure but the assets and liabilities are required to be ring-fenced from each other. In addition to that, FPIs with segregated portfolio are required to provide Beneficial Ownership (BO) declaration for each fund/sub-fund/share class/equivalent structure that invests in India. The details have to be provided at the time of renewal of registration or within 6 months from the date of notification, whichever is later. Furthermore, no fresh purchases can be made unless FPI is brought in compliance with the said requirement and one who does not adhere shall not be allowed to invest in India, at a later point of time.
Issuance of Offshore Derivative Instruments (ODIs) by Foreign Portfolio Investors
ODIs also known as participatory notes are an instrument that is used as a mode by the foreign investors to enter into the investment security market of India without being registered with the SEBI. These participatory notes are issued by Indian-based brokers or Foreign Institutional Investors listed with SEBI, to foreign investors and these brokers do the part of investing on behalf of such investors. Through the regulations, a narrow relief has been sought which allows Category 1 FPIs eligible to issue ODIs to Category 1 eligible entities. Basically, these regulations have removed the essentials pertaining to “regulated by an appropriate foreign regulatory authority” and has instead permitted issuance of ODIs by Category I FPIs and issuance of ODIs to persons eligible for registration as Category I FPIs which extensively means that an unregulated entity which is eligible to seek registration as a Category I FPI is permitted to hold an ODI. With that, the conditions that are mentioned in the regulations are required to be thoroughly followed and non-compliance to that will result in no fresh derivative. A time frame of 90 days after the release of notification is given to bring in compliance with requirements. Further, if an ODI subscriber becomes ineligible due to these new regulations, they may be allowed to continue holding the position till the 31st of December, 2020.
Conclusion
India that is one of the strongest economies lacks the criteria of doing business with ease. Mostly due to complex procedures, the foreign investors resist investing in India and find some other country with simplified procedures to carry out their investment plan. Through the operational guidelines read with SEBI regulations of 2019, legal compliance for FPIs may get simplified and a boost in the portfolio investment can be predicted in the near future. Modifications that have been incorporated are a step towards a liberalized economy baiting more investors to pump the investment in India in a more uniform method. These regulations shall infuse the gap that was created in the overhauled economy and it is highly likable that the lost confidence in the foreign investment shall revive this year i.e. 2020.
He holds a Bachelor’s and Master’s Degree in Corporate Secretaryship and a Degree in Law. He is a Fellow member of the Institute of Company Secretaries of India and an Associate Member of the Corporate Governance Institute, UK and Ireland. He has also completed a program from ISB on ‘Value Creation through Mergers and Acquisitions.
Mr P Muthusamy is an Indian Revenue Service (IRS) officer with an outstanding career of 30+ years of experience and expertise in all niche areas of Indirect Taxes covering a wide spectrum including GST, Customs, GATT Valuation, Central Excise and Foreign Trade.
During his judicial role, he heard and decided a large number of cases, including some of the most sensitive, complicated, and high-stake matters on insolvency and bankruptcy, including many cases on resolution plans, shareholder disputes and Schemes of Amalgamation, De-mergers, restructuring etc.,
Ms. Sarah Abraham has been enrolled with the Bar Council of Tamil Nadu since 1998. Her areas of practice include Shareholder Disputes, Corporate Compliances, Mergers and Acquisitions, Private Equity/ Venture Capital Agreements and allied disputes, Information Technology Contracts, Intellectual Property, General Commercial Agreements, Litigation, Arbitration and Mediation.
A K Mylsamy is the Founder, Managing Partner and the anchor of the firm. He holds a Degree in law and a Degree in Literature. He is enrolled with the Bar Council of Tamil Nadu.
M Subathra holds a Degree in law and a Master’s Degree in International Business Law from the University of Manchester, United Kingdom. She is enrolled with the Bar Council of Tamil Nadu.
Mr. K Rajendran is a former Indian Revenue Service (IRS) officer with a distinguished service of 35 years in the Indirect Taxation Department with rich experience and expertise in the fields of Customs, Central Excise, Service Tax and GST. He possesses Master’s Degree in English literature. Prior to joining the Department, he served for the All India Radio, Coimbatore for a period of about 4 years.
An MBA from the Indian Institute of Management, Calcutta, and an M.Sc. in Tourism Management from the Scottish Hotel School, UK, Ashok Anantram was one fo the earliest IIM graduates to enter the Indian hospitality industry. He joined India Tourism Development Corporation (ITDC) in 1970 and after a brief stint proceeded to the UK on a scholarship. On his return to India, he joined ITC Hotels Limited in 1975. Over the 30 years in this Organisation, he held senior leadership positions in Sales & Marketing and was its Vice President – Sales & Marketing. He was closely involved in decision making at the corporate level and saw the chain grow from a single hotel in 1975 to a very large multi-brand professional hospitality group.
Mani holds a Bachelor Degree in Science and P.G. Diploma in Journalism and Public Relations. He has a rich and varied experience of over 4 decades in Banking, Finance, Hospitality and freelance Journalism. He began his career with Andhra Bank and had the benefit of several training programs in Banking.
Mr. Kailash Chandra Kala joined the Department of Revenue, Ministry of Finance as ‘Customs Appraiser’ at Mumbai in the year 1993.
S Ramanujam, is a Chartered Accountant with over 40 years of experience and specialization in areas of Corporate Tax, Mergers or Demergers, Restructuring and Acquisitions. He worked as the Executive Vice-President, Group Taxation of the UB Group, Bangalore.
K K Balu holds a degree in B.A and B.L and is a Corporate Lawyer having over 50 years of Legal, Teaching and Judicial experience.
Justice M. Jaichandren hails from an illustrious family of lawyers, academics and politicians. Justice Jaichandren majored in criminology and then qualified as a lawyer by securing a gold medal. He successfully practiced in the Madras High Court and appeared in several civil, criminal, consumer, labour, administrative and debt recovery tribunals. He held office as an Advocate for the Government (Writs Side) in Chennai and was on the panel of several government organizations as senior counsel. His true passion lay in practicing Constitutional laws with focus on writs in the Madras High Court. He was appointed Judge, High Court of Madras in December 2005 and retired in February 2017.
S Balasubramanian is a Commerce and Law Graduate. He is a member of the Delhi Bar Council, an associate Member of the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India and Management Accountants of India.