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RBI Compliance
In our article on FEMA compliances for FDI, we obtained a detailed understanding of Foreign Direct Investment compliances, what it meant, and the two routes available for attracting FDI. Apart from that, sectors falling under the automatic and approval route were discussed as well. Leaping further, here is a detailed discussion of the various RBI compliance requirements with respect to the FDI. However, let's take a quick look at the meaning of FDI and RBI-FDI compliance before discussing the relevant regulations.
What is FDI?
Foreign Direct Investments is the investment in an Indian entity by an investor resident outside India. This has been one of the most effective ways to raise capital among Indian businesses. The investments are usually made against the issue of equity interest in the investee.
What is RBI-FDI Compliance?
Foreign Direct Investments are regulated by detailed provisions and regulations as prescribed by the Reserve Bank of India. RBI through its Master Circular No. 15/2015-16 prescribed detailed provisions to regulate the FDI transactions in India. This was followed by the FED Master Direction No. 11/2017-18 further providing directions with respect to the foreign investments in India. Let's have a detailed look at RBI compliances and regulations in regard to the FDI.
Important FDI Regulations Prescribed by RBI
Following are the important regulations prescribed by RBI vide its Master Circular and Master Directions with respect to the FDI compliances:
Entry Routes
Eligibility of Investors
Any person or an entity resident outside India or incorporated outside India.A citizen or any entity incorporated in Pakistan or Bangladesh can invest through FDI only with the prior approval of FIPB and subject to such terms and conditions as mentioned in the FDI policies and Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000.
Non-Resident Indians, residents, as well as citizens of Bhutan and Nepal, can invest in convertible debentures and shares of Indian companies on a repatriation basis. However, the investment shall be made only through normal banking channels or by debit to the NRE/ FCNR (B) by way of inward remittance of free foreign exchange.
Type of Instruments that can be issued
These instruments shall be issued subject to the valuation norms, pricing guidelines as well as reporting requirements as per the FEMA guidelines.
Lock- in Period
The lock-in period shall be higher of:
Exit Price
There shall not be any fixed or assured exit price and the non-resident investor shall exit at the fair price prevailing.
Mode of Payment
Against the issue of shares or convertible debentures, the Indian company shall receive payment in any of the following modes:
The time limit for Issue of Securities
The shares or convertible debentures shall be issued within 180 days of receipt failing which the consideration received shall be refunded. However, the RBI may allow allotment of securities after 180 days after furnishing sufficient reasons on an application.
Mode of Investments
Following are the modes of investments under the Foreign Direct Investment scheme:
Acquisition of shares through Merger and Acquisition
In case of a merger or acquisition between two or more Indian Companies, the transferee company can issue its shares to the transferor company’s shareholders resident outside India subject to the condition that the percentage of shareholding by non-residents does not exceed the sectoral cap and the transferor or transferee or new company is not engaged in the activities prohibited for FDI purposes.
FDI in Limited Liability Partnerships
Subject to the conditions as provided in Annex-B, Limited Liability Partnerships that are registered under the Limited Liability Partnership Act, 2008 are eligible to accept FDI through the approval route.
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