India: Foreign Investment Regime Overhauled | Draining The Swamp?

Last Updated: 17 November 2017
Article by Aakash Choubey, Suditi Surana and Aravind Venugopal

Most Read Contributor in India, July 2019

On 7 November 2017, the Reserve Bank of India (RBI) issued Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2017 (New FEMA 20) to replace the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2000 (Old FEMA 20) and the Foreign Exchange Management (Investments in Firms or Proprietary concern in India) Regulations, 2000 (FEMA 24). New FEMA 20 consolidates Old FEMA 20 and FEMA 24.

The New FEMA 20 eliminates several redundancies and clarifies a plethora of interpretational issues that plagued old regime.

Investment Instruments | Some New & Some Modified

  • Portfolio investments in listed companies by non-FPIs: A new route has been made available for foreign investments by any Non-Resident (NR) up to a 10% limit in listed companies. Primary subscription under this route does not require advance reporting or FC-GPR reporting.
  • Warrants: Only listed companies can issue warrants to NRs, as such warrants are required to be compliant with the Securities and Exchange Board of India (SEBI) regulations.
  • Cap of Dividend on preference shares: The dividend limit of 300 basis points over SBI PLR that applied to compulsorily convertible preference shares issued to NRs no longer applies.
  • FVCIs: FVCIs are now expressly permitted to invest in non-convertible instruments. The language under the previous regulations was ambiguous.

Sectors Changes

  • Private Security agencies: Sectoral cap for private security agencies has been reduced from 74% to 49% under the approval route.
  • Commodities spot exchanges: Sectoral cap of 49% under automatic route has been specified for investments in commodities spot exchanges. Guidelines for investments will be prescribed by the government in due course.

Changes involving Various Investment Routes

  • Renunciation of rights issue entitlement: Pursuant to a rights issue, NRs can now acquire capital instruments (other than share warrants) that are renounced by residents. Rights issues are permitted at the price: (a) determined by the company, in case of a listed company; and (b) at which instruments are offered to residents.
  • Transfers by NRIs: Transfer of capital instruments by a Non-Resident Indian (NRI) to an NR no longer requires RBI approval.
  • Reclassification of FPI holding: The total investment made by a SEBI registered foreign portfolio investor (FPI) in a listed company will be re-classified as FDI where it's holding exceeds 10% of the paid-up capital or 10% of the paid-up value in respect of each series of instruments. Such a reclassification is required to be reported by way of Form FC-GPR.
  • Mandatory divestments by FPIs, NRIs and OCIs: FPIs, NRIs or Overseas Citizens of India (OCIs) are required to mandatorily divest their holdings that exceed the prescribed limits. Provisions and timelines for such divestment are yet to be notified.
  • Non-repatriable investments: Non-repatriable (Non-Repat) investments are treated at par with domestic investments for almost all purposes.
  • Investments in firms and proprietary concerns: The regime governing investments in firms and proprietary concerns (FEMA 24) has been consolidated into the New FEMA 20.

Other Key Changes Impacting M&A Transactions

  • Delay in reporting and title to securities: Delay in complying with reporting requirements (Form FC GPR, Form FC TRS and other prescribed reportings) will attract late fees (to be decided by RBI). However, such delays will not affect acquirer's title to securities.
  • Calculating downstream investments: Due to certain drafting ambiguities, investments made by Foreign Owned and Controlled Indian Companies (FOCCs) in any form of capital that is not mandatorily convertible into equity shares (vis. redeemable preference shares, etc.) may be counted towards downstream investments. Further, ambiguity regarding FOCCs' ability to invest in non-convertible instruments persists.
  • Pricing and reporting of downstream investments: Applicability of pricing guidelines and reporting of transactions involving FOCCs are summarised below:







No reporting



Form DI










No reporting


  • Deferred consideration, escrow, indemnity in transfers: Operational matters involving deferred consideration, post-closing escrows and indemnity have been clarified:



Deferred consideration (Form FC-TRS to be filed for every tranche of consideration)

18 months from transfer
agreement date

Escrow arrangement

Indemnity obligations

18 months from payment of
the full consideration


Note: In all cases: (a) an amount not exceeding 25% of the total consideration can be adjusted through any of the above methods; and (b) the total consideration finally paid (post the adjustment) should comply with applicable pricing guidelines.

  • Pricing ambiguity for listed securities: An ambiguity has arisen in context of transfer of capital instruments of a listed company by a resident to a NR as an off-market transaction. Under the previous regulations, floor price for such transfers was determined on the same principle applicable for preferential allotment of listed companies, with 'relevant date' being the date of transfer of shares. Clarity on 'relevant date' is absent for such transfer from a resident to a NR, and can now be interpreted to be either the 'date of execution of definitive agreement' or the 'date of transfer of capital instrument'.
  • Pledge of unlisted instruments by NRs to NBFCs: NRs are now permitted to pledge unlisted shares in favour of NBFCs without a specific RBI approval (after the authorised dealer is satisfied of the bona fides of the credit facility).
  • Valuation in LLP transactions: The fair price of capital contribution/ profit share of LLPs (in transfers between residents and NRs) is required to be determined by a chartered accountant, practicing cost accountant or an approved valuer from a panel maintained by the central government as per any valuation norm which is internationally accepted/ adopted as market practice.

Changes in Procedure

  • Direct offshore repatriation by FVCIs: FVCIs are now permitted to directly repatriate sale proceeds offshore.
  • Timeframe for allotment: In line with the Companies Act, 2013, the timeframe for allotting instruments has been reduced to 60 days from 180 days.
  • FC-TRS for FPIs and FVCIs: Transactions involving sale of securities by FPIs and FVCIs to residents are also required to be reported by way of FC-TRS.
  • FC-TRS for on-market transactions: NR has the onus to file FC-TRS for transfers on the floor of the stock exchange, which was previously responsibility of the investee company.
  • Reporting requirements for downstream investments: Downstream investments are required to be reported by way of Form DI within 30 days of investment, irrespective of whether securities have been allotted. Format of form DI has not yet been prescribed.
  • Reporting requirements for LLP transfers: Transfer of capital contribution/ profit share of LLPs are required to be reported by way of Form LLP(II). It is not clear which party is obligated to make this filing.
  • Reporting convertible notes: Start-ups issuing convertible notes are required to file Form CN within 30 days of issue. Residents buying or selling convertible notes are also required to file Form CN within 30 days of transfer. Format of Form CN has not yet been prescribed.


The New FEMA 20 is a long overdue and welcome attempt to provide a clearer and more business friendly regulatory framework. However, interpretational ambiguities exist in certain areas. We expect further clarifications on these issues in the days to come.

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

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