Foreign Exchange Management Act

Foreign Exchange Management Act (Part 1)

Definition: The Foreign Exchange Management Act (FEMA) is an act of the Parliament of India that was enacted in 1999 to replace the Foreign Exchange Regulation Act (FERA) of 1973.
Objectives: FEMA aims to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of foreign exchange market in India.

Key Concepts

FEMA and Securities Market: FEMA regulates and supervises the transactions involving foreign exchange in the securities market, facilitating the growth and development of the Indian economy.
Foreign Direct Investment (FDI): FDI in India is undertaken in accordance with the FDI Policy of the Government of India and governed by the provisions of FEMA, 1999.
Entry Routes for Investments: Investments can be made in shares, mandatorily and fully convertible debentures, and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes:
- Automatic Route: No approval from the Reserve Bank or Government of India is required for the investment.
- Government Route: Prior approval of the Government of India is required for the investment.
Type of Instruments: Indian companies can issue equity shares, fully and mandatorily convertible debentures, fully and mandatorily convertible preference shares, and warrants.
Pricing Guidelines: The price of shares issued to persons resident outside India under the FDI Scheme shall be based on SEBI guidelines in case of listed companies, and not less than the fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant in case of unlisted companies.
Mode of Payment: An Indian company issuing shares/convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares/convertible debentures by:
- Inward remittance through normal banking channels.
- Debit to NRE/FCNR account of a person concerned maintained with an AD category I bank.
- Debit to non-interest bearing Escrow account in Indian Rupees in India.
Acquisition/Transfer of Existing Shares: The pricing of shares/convertible debentures/preference shares should be decided/determined upfront at the time of issue of the instruments or based on a conversion formula which has to be determined/fixed upfront, in accordance with the extant FEMA regulations.

Foreign Exchange Management Act (Part 2)

Pricing Guidelines: The Reserve Bank of India specifies pricing guidelines that must be followed for foreign direct investments. If these guidelines are not met, the resultant FDI must comply with the extant FDI policy and FEMA regulations.
Compliance with SEBI Regulations: The pricing for the transaction must be compliant with specific SEBI regulations, such as IPO, book building, block deals, delisting, open/exit offer, and substantial acquisition.
Documentation Requirements: A CA certificate must be attached to the Form FC-TRS to be filed with the AD bank, confirming compliance with relevant SEBI regulations.

Transfer of Shares

Government Approval: Transfer of shares from residents to non-residents by way of sale or otherwise requires Government approval in certain cases, such as:
- Transfer of shares of companies engaged in sectors falling under the Government Route.
- Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable.
Prior Permission of the Reserve Bank: Prior approval of the Reserve Bank is required for acquisition/transfer of security in certain cases, such as:
- Transfer of shares or convertible debentures from residents to non-residents by way of sale with deferred payment.
- Transfer of shares by way of gift to a person resident outside India, subject to certain conditions.

Acquisition of Shares

FDI Scheme: A non-resident can acquire shares of a listed Indian company on the stock exchange through a registered broker under the FDI scheme, subject to certain conditions.
Issue of Shares: Indian companies can issue shares through various modes, such as:
- Rights/Bonus Shares: Issue of rights/bonus shares to existing non-resident shareholders, subject to sectoral cap and reporting requirements.
- Employees Stock Option Scheme (ESOPs): Issue of employees' stock option and/or sweat equity shares to employees/directors of the company or its holding company/joint venture/wholly owned overseas subsidiary.
- Scheme of Merger/Amalgamation: Issue of shares to shareholders of the transferor company resident outside India, subject to certain conditions.

Portfolio Investment Scheme (PIS)

Eligible Entities: Foreign Portfolio Investors (FPIs) registered with SEBI and NRIs are eligible to purchase shares, convertible debentures, and warrants issued by Indian companies under PIS.
Investment Limits: FPIs and NRIs have specific investment limits, such as:
- FPIs: up to 10% of the paid-up capital or paid-up value of each series of convertible debentures.
- NRIs: up to 5% of the paid-up capital or paid-up value of each series of debentures.
Remittance of Sale Proceeds: AD Category-I banks can allow remittance of sale proceeds of a security to the seller of shares resident outside India, subject to certain conditions.

Foreign Venture Capital Investments

SEBI Registered FVCI: A SEBI-registered Foreign Venture Capital Investor (FVCI) can invest in equity/equity-linked instruments/debt/debt instruments of an Indian Venture Capital Undertaking (IVCU) or Venture Capital Fund (VCF).
Other Foreign Investments: NRIs can purchase shares, convertible debentures, and warrants issued by an Indian company on non-repatriation basis without any limit.

Foreign Exchange Management Act (Part 3)

Definition: The Foreign Exchange Management Act (FEMA) is a regulation in India that governs foreign exchange transactions and investments.
Details: It is divided into two main parts: Foreign Exchange Management (Debt Instruments) Regulations, 2019, and Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Key Concepts

Foreign Portfolio Investor (FPI): An FPI is an investor who invests in debt instruments in India on a repatriation basis.
Non-Resident Indians (NRIs) or Overseas Citizens of India (OCIs): NRIs or OCIs can invest in debt instruments on both repatriation and non-repatriation basis.
Eligible Entities: Indian companies, Limited Liability Partnerships, Asset Reconstruction Companies, Mutual Funds, and Venture Capital Funds are eligible to receive debt funds.

Investment Options

FPIs: Can invest in dated government securities, non-convertible debentures, commercial papers, units of domestic mutual funds, and other debt instruments.
NRIs/OCIs: Can invest in government dated securities, bonds issued by Public Sector Undertakings, listed non-convertible preference shares, and debt instruments issued by banks.

Taxation and Remittance

Taxes: All transactions under these regulations are subject to applicable taxes and duties in India.
Remittance: Sale proceeds can be remitted outside India or credited to a foreign currency account or Special Non-Resident Rupee (SNRR) account.

Non-Debt Instruments

Definition: Non-debt instruments include equity instruments, capital participation in LLPs, and investments in Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).
Reporting Guidelines: Indian companies are required to report the details of receipt of consideration for issue of shares, and annual returns on foreign liabilities and assets.

Reporting Requirements

Form FC-GPR: To be filed by Indian companies after issue of shares to non-resident investors.
Form FC-TRS: To be filed for transfer of shares between residents and non-residents.
Form ESOP: To be filed by Indian companies issuing sweat equity shares or employees' stock options to non-resident employees.