FEMA20(R) Revamped: Government’s continuous approach to increase foreign investment inflow

Posted On - 27 November, 2019 • By - Mohana Roy

The Foreign Direct Investment (“FDI”) equity inflow in India dropped in
2018-2019. This has happened for the first time in the past six years, says the
released by the Department for Promotion of Industry and Internal Trade(“DPIIT”). The falling equity inflows
triggered the government to examine India’s Foreign Direct Investment Policy (“FDI Policy”). After much deliberation,
the government recently came up with the Foreign Exchange Management (Non Debt
Instruments) Rules, 2019 (the “Rules”)
and the Foreign Exchange Management (Debt Instrument) Regulations, 2019 (the “Debt Regulations”), and the Foreign
Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments)
Regulations, 2019 superseding the Foreign Exchange
Management (Transfer of Issue of Security by a Person Resident outside India)
Regulations, 2017(“Erstwhile Regulation”) and the Foreign Exchange
Management (Acquisition and Transfer of Immovable Property in India)
Regulations, 2018. Not only these but the government in August 2019 amended the
FDI Policy in order to open up new sectors and liberalise the existing FDI
Policy with a view to increase the FDI inflow and create more opportunities in
the Indian market. Further, DPIIT also released Press Note 4(2019 Series) in
September 2019 consolidating all the amendments in FDI Policy.

article further discusses the pertinent features of the Rules, the Debt
Regulation, and the amended FDI Policy.

Instruments Rules[2]

Rules governs the provision related to investment by a person resident outside
India by way of various equity instruments such as rights issue, bonus issue,
employee stock option, sweat equity, etc.

Rules has replaced the definition of capital instrument as defined under the
Erstwhile Regulation with equity
instruments, debt instruments, and non-debt instrument.
However, there is no
difference in the terms of the capital instrument and equity instrument. The
detail definition of equity instrument remains same as the definition of the capital

Further, the Rule has added ambiguity with regards
to the treatment of non- convertible, optionally convertible preference shares
as it has removed the explanation provided along with the definition of the capital
instrument under the Erstwhile Regulation.

optionally or partially convertible preference shares has been included under
the definition of “hybrid securities” which is defined as instruments such as optionally or partially convertible preference
shares or debentures and other such instruments as specified by the Central
Government from time to time, which can be issued by an Indian company or trust
to a person resident outside India.
the Rules does not prescribe any terms and conditions or criterion for the issue
of such hybrid securities as of now.

Rules also brings non-debt instruments such as units of Alternative Investment
Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure
Investment Trusts (Invits), units of mutual funds or Exchange-Traded
Fund (ETFs) which invest more than fifty per cent in equity,
acquisition, sale or dealing directly in immovable property, contribution to
trusts, etc.  under its purview. However,
the treatment of such instruments could not be determined at this early stage.

Rules have now allowed Foreign Portfolio Investment (FPI) investment in Category
III AIFs. However, it is mandatory for the FPIs to obtain no- objection under
the SEBI (Mutual Funds) Regulations, 1996 and to invest in such AIFs which
further invest more than 50% in equity or in REITs.

the sectoral cap for FPI has been revised with effect from April 1, 2020. Now
the cap for FPI shall be the relevant sectoral cap, whereas for lowering the
limit, a company shall require to pass a board resolution to that effect before
March 31 2020. The Rules also allow the companies to increase the limit after
decreasing, however, it does not allow to decrease the limit again once it has
been increased.

the companies where FDI is prohibited, the FPI cap shall remain at 24 % in

Rules has done away with the requirement of a certificate from the statutory
auditor of the Indian subsidiary company for the purpose of pre-incorporation
expense from the foreign holding company, which was a mandate under the
Erstwhile Regulation.

definition of e-commerce entity under the Rules no longer includes a foreign
company and now, an e-commerce business can only be undertaken by a company
incorporated in India under the Indian Corporate laws. It also excludes branch,
office or agency in India owned by a person outside India. Hope this change
will remove the confusion which was there with regards to the inclusion of
foreign companies.

the most significant change brought in by the Rules is the dilution of
authority. Earlier it was only the Reserve Bank of India (“RBI”) who was empowered to provide approvals for transactions under
the Erstwhile Regulation, however, now the final authority rests with the
Central Government as the RBI shall have to consult with the Central Government.

with the Rules, the government has also notified the Foreign Exchange Management (Mode of Payment and
Reporting of Non-Debt Instruments) Regulations, 2019, which prescribes the
compliance requirements on the investment made by a foreign person in India and
the mode of remittance of payments.


Erstwhile Regulation constituted both debt and non-debt instruments and
investment by the foreign person on the same under a single roof, however, post
the suppression of the Erstwhile Regulation, debt instruments are brought under
the Debt Regulation. It will govern the issuance of government bonds, corporate
bonds, depository receipts whose underlying securities are debt securities.
However, there are ambiguities with regards to non-convertible or optionally
convertible instruments as they are presently not made part of the Debt

FDI Policy Press
Note 4 (2019 Series)

Government of India, in September 2019, amended the FDI Policy to liberalise
foreign investment norms. The Press Note 4 especially liberalised and eased the
policy pertaining to single, brand retailing, contract manufacturing, digital
media sector, and coal mining[3].


Where the recent developments by the government are in order to increase the equity inflow by liberalizing the current regime, the government skipped incorporating the changes brought in by Press Note 4 (2019 Series). In such a scenario it is difficult to interpret government’s intentions as definitely government does not intend to go back to a stricter or stringent regime from a liberalised one. However, the changes brought in by the government by bifurcating the framework between debt and the non-debt instrument is a welcoming change and indeed it will ensure the efficacy in compliance and reporting by the entities as well as provide a friendly environment to the foreign entities for investment in India. However, the present form of the Rules and the Debt Regulation will also add up to confusion which the government must clarify.

Contributed By – Mohana Roy
Designation – Associate

King Stubb & Kasiva,
Advocates & Attorneys

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