Streamlining legislative framework for Foreign Direct Investment (FDI) – Eshwars
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Streamlining legislative framework for Foreign Direct Investment (FDI)





The Government of India has notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (hereinafter “New FDI Rules”), to supersede Foreign Exchange Management (Transfer of Issue of Security by a person resident outside India) Regulations, 2017 (erstwhile FEMA 20 Notification) and Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.

The said New FDI Rules is now the governing legislative framework for Foreign Direct Investments (FDI) in India w.e.f. 17th October 2019. It sets out distinction between Debt and Non-debt instruments, by defining what non-debt instruments are.

The “Non- Debt Instruments” is defined as

  • all investments in equity instruments in companies and LLPs;
  • all instruments of investment recognised in the FDI such as convertible debentures;
  • investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts);
  • investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per cent in equity;
  • junior-most layer (i.e. equity tranche) of securitisation structure;
  • acquisition, sale or dealing directly in immovable property;
  • contribution to trusts; and
  • depository receipts issued against equity instruments.

The New FDI Rules is a welcome step to avoid the conflicts between various regulations, policies, guidelines etc. regarding the FDI and clearly sets out the rules for foreign investment in India under various sectors. In pursuance of the said New FDI Rules, the RBI has notified Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 [”New Regulations”] w.e.f the same date as above, regulating mode of payment, remittance of sale proceeds and reporting requirements for investment in India by a person resident outside India for each Non-Debt Instruments including Convertible Notes [“CN”] issued by Indian Start-up Companies. The New Regulations also specifically lays down the reporting requirements for any downstream investment made by any Indian company qualifying as indirect foreign investment pursuant to the New FDI Rules.

The reporting requirements include filing forms including FC-GPR, FLA, FC-TRS, ESOP, Form CN etc., wherein the format, periodicity and manner of such reporting shall be prescribed thereunder or by RBI, if any required. All reporting shall be made through or by an Authorized Dealer bank, as the case may be. Any delay in reporting shall attract the late submission fee, which may be decided by RBI in consultation with the Central Government.

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