India: RBI Master Directions On Foreign Investments And Reporting

Last Updated: 30 January 2018
Article by Bhavik Narsana, Aravind Venugopal and Suditi Surana

Most Read Contributor in India, August 2019

Last year, the Reserve Bank of India (RBI) overhauled India's foreign investment regime by issuing the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations 2017 (FEMA 20). Our analysis of the key changes introduced by FEMA 20 is available here.

The RBI has now issued operational instructions to AD Banks by issuing a fresh set of Master Directions on Foreign Investment in India (MD - FI) and amending the Master Directions on Reporting under Foreign Exchange Management Act, 1999 (MD - Reporting).

Please see below an overview of the significant changes and clarifications:

Key Changes and Clarification impacting M&A Transactions

  • Venture capital funds: Under FEMA 20, 'investment vehicles' were defined to include all entities registered with the Securities and Exchange Board of India implying that VCFs would be considered as an investment vehicle. RBI has now specifically carved out VCFs from the definition of 'investment vehicle' in the MD - FI. Accordingly, investments by VCFs with foreign investment will be subject to downstream investment requirements.
  • Foreign portfolio investors (FPI): The following provisions in the master directions with respect to FPIs are noteworthy:

    • FPI ceiling: MD-FI clarifies that investments made by FPIs through off-shore funds, global depository receipts and euro-convertible bonds would not be counted to calculate the ceiling on FPI holdings and only investment in capital instruments acquired through primary and secondary market would be included.
    • Short selling by FPIs: Short selling by FPIs is permissible only if a 2% headroom is available for foreign investment and/ or aggregate FPI investment limits. The designated custodian bank has to report all short selling transactions and lending and borrowing of equity shares by FPIs to RBI on a daily basis.
    • Investment by FPIs in NCDs: Consistent with the approach adopted by SEBI, the MD-FI provides that FPIs can invest: (i) in primary issuance of 'to be listed' non-convertible debentures (NCDs) / bonds only if listing is committed within 15 days of such investment; and (ii) in unlisted NCDs or bonds only if such instruments have a minimum residual maturity of 3 years and end use restrictions on investments in real estate business, capital market and purchase of land.
  • Pricing ambiguity regarding listed securities: The ambiguity prevailing under FEMA 20 regarding the price at which off-market transfer of capital instruments from a resident to a non-resident (NR) should take place has been resolved. While FEMA 20 provided that such transfers should take place at the price applicable to preferential allotments, it was silent as to what the relevant date for such a preferential allotment will be. It has now been clarified that the relevant date for this purpose will be the date of transfer of shares from the resident to an NR.
  • AD Bank's responsibility in financial sector investments: MD – FI now provides that in case of transfer of capital instruments of companies engaged in 'financial sector' from a resident to an NR, the 'fit and proper/ due diligence' requirement regarding the NR stipulated by the respective financial sector regulator is to be complied with by the AD Bank.
  • Downstream investment regime:

    • Funds for downstream investment by Indian entity: Foreign owned and controlled Indian entities (FOCCs) are prohibited from using funds borrowed in domestic markets for making downstream investments. MD – FI clarifies that subscriptions by NRs to NCDs of an Indian company will not be considered as funds borrowed in domestic markets. Accordingly, funds raised by an FOCCs by issuing NCDs to FPIs can be used for making downstream investments. Ability of NRs other than FPIs to subscribe to NCDs of an Indian company for making downstream investments continues to be curtailed by the external commercial borrowing regulations of the RBI.
    • Pricing and reporting of downstream investments: In terms of the MD – FI, the pricing and reporting requirements applicable to downstream investments by FOCCs are as below:

      FOCC Resident No reporting
      Resident FOCC Form DI
      FOCC NR X Form FC-TRS
      NR FOCC Form FC-TRS
      FOCC FOCC X No reporting
  • Issue of partly paid shares: Partly paid shares are required to be fully called up within 12 months from its issuance. MD – FI relaxes this requirement if the issue size is greater than INR 5 billion. In such a scenario, listed companies are required to comply with the requirements of SEBI ICDR Regulations and appoint a monitoring agency. The relaxation is also available to unlisted companies, subject to such company appointing a monitoring agency on the same lines as required in case of listed companies. Further, it has been clarified that partly paid shares cannot be issued in lieu of funds payable to a non-resident (NR) by an Indian company.
  • Amendment to tenure of convertible instruments: MD – FI now provides that the tenure of compulsorily convertible debentures and preference shares can be amended in accordance with the Companies Act 2013.
  • Transfer by pledge:

    • Pledge of capital instruments: FEMA 20 permitted promoters of Indian companies with external commercial borrowings (ECBs) to pledge 'shares' of the borrowing company or associate Indian companies for securing the ECBs. MD – FI clarifies that all 'capital instruments' (and not just shares) can be pledged by the promoters, subject to the conditions set out in MD - FI.
    • Additional restrictions for pledge: MD – FI provides that capital instruments pledged by an NR in favour of an Indian bank, overseas bank or an NBFC and by promoters for securing the ECBs should be unencumbered. Additionally, MD – FI requires companies to obtain a no-objection certificate from its existing lenders, if any, for the creation of such pledge.
  • Mandatory divestments by FPIs, NRIs and OCIs: MD – FI provides that FPIs, NRIs and overseas citizens of India that breach their prescribed ceiling are required to mandatorily divest their holding within 5 trading days after settlement. This requirement will be effective only when the corresponding regulations under FEMA 20 come into force.
  • Effect of change in residential status/ inheritance: MD – FI confirms that security held by an NR which has been inherited from a resident or acquired by him when he was a resident will be held by such NR on a non-repatriation basis.

Key Changes and Clarifications to Reporting regime

  • FC-GPR for FVCIs: While FEMA 20 required filing of Forms ARF and FC-GPR only for foreign direct investment, the MD on Reporting extends this requirement to issuance of capital instruments to foreign venture capital investors as well.
  • Notification to depositories: Indian companies with foreign investment must upload their total foreign investment limits and permissible sectoral limits on portals of the Indian depositories. It is not clear whether this requirement applies only to listed companies or to all companies having shares in dematerialised form. Further, headroom available for proximate scrips must be displayed on the website of the depositories and exchanges.
  • IPOs and QIPs: Form FC-GPR filing is not required to be filed for shares allotted under initial public offer and qualified institutional placements.
  • Late filing fee: MD on Reporting sets out the quantum of late payment fees for delay in reporting foreign investment transactions. The key provisions regarding late payment fees have been summarised below:

    Up to 10 million 0.05 percent INR 1 million or 300% whichever is lower
    More than 10 million 0.15 percent INR 10 million or 300% whichever is lower
    1. The applicable percentage of LSF is doubled every twelve months.
    2. The period of contravention will be considered proportionately and calculated as: (approx. rounded off to next higher month ÷ 12) X amount for 1 year
    3. The period of delay would begin from the day after the 30th day (from the date of receipt of funds/ allotment or transfer of shares) and end on the day preceding the day on which the transaction is reported to the AD Bank. While this is aligned with the ARF and FC-GPR timelines, the timeline for FC-TRS is 60 days from the date of transfer. Accordingly, the manner in which the period of delay will be computed for FC-TRS is ambiguous.
  • Buy-back of shares in an amalgamation: In terms of the MD on Reporting, if a buy back is contemplated under a scheme of merger, demerger or amalgamation, then the Indian company is required to report such transaction by filing Form FC-TRS.
  • Reporting of beneficial interest: If capital instruments of an Indian company are transferred or issued such that the remitter of the consideration is different from the person receiving shares, then, while reporting the transaction in Form FC-GPR or Form FC-TRS, inter alia the following documents are to be submitted: (a) KYC of the remitter and beneficiary; and (b) no-objection certificate from the remitter; and (c) a letter from the beneficiary explaining the reasons for remitter being different.


While the Master Directions has provided interpretational aids on a plethora of issues, clarifications with regard to some key aspects such as ability of an unlisted company to issue warrants, FOCCs' investments in non-convertible instruments, etc are still awaited. Further clarifications from the RBI may be forthcoming in the near future.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions