Comparative analysis of FEM (Debt Instruments) Regulations, 2019 vis-à-vis old norms

RBI has notified Foreign Exchange Management (Debt Instruments) Regulations, 2019 (‘Debt Instrument Regulations’) vide. Notification dated October 17, 2019. The regulations supersedes erstwhile FEM (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 and are effective from Oct 17, 2019. The new regulation has been issued in order to bifurcate regulatory control over debt & non-debt instruments between the RBI and the Central Government.

The Comparative analysis of the Debt Instrument regulations vis-à-vis FEM (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 are discussed hereunder:

FEM (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017	Foreign Exchange Management (Debt Instruments) Regulations, 2019	Comments
Definition of debt instrument:No Definition	Definition of debt instrument: ‘Debt Instrument’ means the instrument defined under the Schedule I of the Regulations.	The term ‘Debt instrument’ was not defined earlier in the erstwhile regulations. Under the new norms ‘Debt Instrument’ means the instrument defined under the Schedule I of the Regulations.
Definition of “investment” means to subscribe, acquire, hold or transfer any security or unit issued by a person resident in India;Explanation – (a) This will include to acquire, hold or transfer depository receipts issued outside India, the underlying of which is a security issued by a person resident in India(b) For the purpose of LLP, investment shall mean capital contribution or acquisition/ transfer of profit shares.	“investment” means to subscribe, acquire, hold or transfer any debt instrument or unit issued by a person resident in India;	The definition under Debt Instruments Regulations stipulates that investment in only Debt instruments would be considered under the meaning of investment. In the erstwhile regulations, the word ‘security’ was mentioned.
Listed Indian Company” means an Indian company which has any of its capital instruments listed on a recognized Stock Exchange (SE) in India and the expression “Unlisted Indian Company” shall be construed accordingly;	“Listed Indian company” means an Indian company which has any of its equity instruments or debt instruments listed on a recognised stock exchange in India and the expression “unlisted Indian company” shall be construed accordingly;	Now a company which has listed any equity or debt would fall under the definition of Indian listed company
Regulation 3. Restriction on investment by a person resident outside IndiaSave as otherwise provided in the Act, or rules or regulations made thereunder, no person resident outside India shall make any investment in India.Provided that an investment made in accordance with the Act or the rules or the regulations framed thereunder and held on the date of commencement of these Regulations, shall be deemed to have been made under these Regulations and shall accordingly be governed by these Regulations.Provided further that the Reserve Bank may, on an application made to it and for sufficient reasons, permit a person resident outside India to make any investment in India subject to such conditions as may be considered necessary.	Regulation 3. Restriction on investment by a person resident outside India. –Save as otherwise provided in the Act, or rules orRegulations made thereunder, no person resident outside India shall make any investment in India.Provided that an investment made in accordance with the Act or the rules or the regulations framed thereunder and heldon the date of commencement of these Regulations, shall be deemed to have been made under these Regulations andshall accordingly be governed by these Regulations:Provided further that the Reserve Bank may, on an application made to it and for sufficient reasons, permit a personResident outside India to make any investment in India subject to such conditions as may be considered necessary.	No change
Regulation 4. (Restriction on receiving investment)Save as otherwise provided in the Act, or rules or regulations made thereunder, an Indian entity or an investment vehicle, or a venture capital fund or a Firm or an Association of Persons or a proprietary concern shall not receive any investment in India from a person resident outside India or record such investment in its books.Provided that the Reserve Bank may, on an application made to it and for sufficient reasons, permit an Indian entity or an investment vehicle, or a venture capital fund or a Firm or an Association of Persons or a proprietary concern to receive any investment in India from a person resident outside India or to record such investment subject to such conditions as may be considered necessary.	Regulation 4. (Restriction on receiving investment)Save as otherwise provided in the Act or rules or regulations made thereunder, an Indian entity or a mutual fund, or a venture capital fund or a firm or an association of persons or a proprietary concern shall not receive any investment in India from a person resident outside India or record such investment in its books :Provided that the Reserve Bank may, on an application made to it and for sufficient reasons, permit an Indian entity or a mutual fund, or a venture capital fund or a Firm or an Association of Persons or a proprietary concern to receive any investment in India from a person resident outside India or to record such investment subject to such conditions as maybe considered necessary	There is no change in the restrictive provisions. The term ‘mutual fund’ has been referred in place of ‘investment vehicle’ in the erstwhile regulations.
Regulation 5. Permission for making investment by a person resident outside IndiaUnless otherwise specified in these Regulations or the relevant Schedules, any investment made by a person resident outside India shall be subject to the entry routes, sectoral caps or the investment limits, as the case may be, and the attendant conditionalities for such investment as laid down in these Regulations. A person resident outside India may make investment as under:(1) A person resident outside India may subscribe, purchase or sell capital instruments of an Indian company in the manner and subject to the terms and conditions specified in Schedule 1.Provided that a person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan cannot purchase capital instruments without the prior Government approval.Provided further, a person who is a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.Note: Issue/transfer of ‘participating interest/right’ in oil fields by Indian companies to a person resident outside India would be treated as foreign investment and shall comply with the conditions laid down in Schedule 1.(2) A Foreign Portfolio Investor (FPI) may purchase or sell capital instruments of a listed Indian company on a recognised stock exchange in India in the manner and subject to the terms and conditions specified in Schedule 2.(3) A Non-Resident Indian or an Overseas Citizen of India may on repatriation basis purchase or sell capital instruments of a listed Indian company on a recognised stock exchange in India, in the manner and subject to the terms and conditions specified in Schedule 3.(4) A Non-Resident Indian or an Overseas Citizen of India may, on non-repatriation basis, purchase or sell capital instruments of an Indian company or purchase or sell units or contribute to the capital of a LLP or a firm or proprietary concern, in the manner and subject to the terms and conditions specified in Schedule 4.(5) A person resident outside India, permitted for the purpose by the Reserve Bank in consultation with Central Government, may purchase or sell securities other than capital instruments in the manner and subject to the terms and conditions specified in Schedule 5.(5)(a) A Foreign Portfolio Investor or a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) may trade or invest in all exchange traded derivative contracts approved by Securities and Exchange Board of India from time to time subject to the limits prescribed by Securities and Exchange Board of India and conditions specified in Schedule 5(5)(b) A Foreign Portfolio Investor may enter into contract in any interest rate derivative subject to conditions laid down by the Reserve Bank from time to time.](6) A person resident outside India, other than a citizen of Bangladesh or Pakistan or an entity incorporated in Bangladesh or Pakistan, may invest, either by way of capital contribution or by way of acquisition/transfer of profit shares of an LLP, in the manner and subject to the terms and conditions as specified in Schedule 6.(7) A Foreign Venture Capital Investor may make investment in the manner and subject to the terms and conditions specified in Schedule 7.(8) A person resident outside India, other than a citizen of Bangladesh or Pakistan or an entity incorporated in Bangladesh or Pakistan, may invest in units of an Investment Vehicle, in the manner and subject to the terms and conditions specified in Schedule 8.(9) A person resident outside India may invest in the Depository Receipts (DRs) issued by foreign depositories against eligible securities in the manner and subject to the terms and conditions as specified in Schedule 9.(10) A Foreign Portfolio Investor or Non- Resident Indian or an Overseas Citizen of India may purchase, hold or sell Indian Depository Receipts (IDRs) of companies resident outside India and issued in the Indian capital market, in the manner and subject to the terms and conditions specified in Schedule 10.	5. Permission for making investment by a person resident outside India.-Unless otherwise specified in theseregulations or the relevant Schedules, any investment made by a person resident outside India shall be subject to the entryRoutes, the investment limits and the attendant conditionalities for such investment as laid down in these regulations.(1) A person resident outside India, permitted for the purpose by the Reserve Bank in consultation with CentralGovernment, may purchase or sell debt instruments in the manner and subject to the terms and conditions specifiedIn Schedule 1.(2) A person resident outside India may trade in all exchange traded derivative contracts approved by Securities and Exchange Board of India from time to time subject to the limits prescribed by Securities and Exchange Board of IndiaAnd conditions specified in Schedule 1.(3) A person resident outside India may enter into contract in any derivative transaction subject to conditions laid down by the Reserve Bank from time to time.	The term ‘debt instrument’ has been referred in the provisions as against the word ‘capital instruments’ in the erstwhile regulations.Provision relating to investment by FPI, NRIs, and OCI on repatriation basis, non-repatriation basis have been provided separately under the Schedule I.Erstwhile norms required citizens of Bangladesh or Pakistan to take prior approval of Government for making any investment in India.The Debt Instruments norms however, doesn’t any such restriction on the citizens of Bangladesh & Pakistan in regulation 5
Regulation 6 – Merger or demerger or amalgamation of Indian companiesWhere a Scheme of Arrangement for an Indian company has been approved by National Company Law Tribunal(NCLT)/ Competent Authority , the Indian company may issue non-convertible redeemable preference shares or nonconvertible redeemable debentures out of its general reserves by way of distribution as bonus to the shareholders residentoutside India, subject to the following conditions, namely:  a. the original investment made in the Indian company by a person resident outside India is in accordance with these Regulations and the conditions specified in the relevant Schedule;  b. the said issue is in accordance with the provisions of the Companies Act, 2013 and the terms and conditions, if any, stipulated in the scheme approved by National Company Law Tribunal (NCLT)/ Competent Authority have been complied with;  c. the Indian company shall not engage in any activity/ sector in which investment by a person resident outside India is prohibited.	Regulation 9 – Merger or demerger or amalgamation of Indian companies(2) Where a Scheme of Arrangement for an Indian company has been approved by National Company Law Tribunal (NCLT)/Competent Authority , the Indian company may issue non-convertible redeemable preference shares or non-convertible redeemable debentures out of its general reserves by way of distribution as bonus to the shareholders resident outside India, subject to the following conditions, namely: (a) the original investment made in the Indian company by a person resident outside India is in accordance with these Regulations and the conditions specified in the relevant Schedule; (b) the said issue is in accordance with the provisions of the Companies Act, 2013 and the terms and conditions, if any, stipulated in the scheme approved by National Company Law Tribunal (NCLT)/Competent Authority have been complied with; (c) the Indian company shall not engage in any activity/sector in which investment by a person resident outside India is prohibited.	No Change in respect of sub-regulation (2) of Regulation 9However, Regulation 9(1) with regard to scheme of merger or amalgamation of two or more Indian companies or a reconstruction by way of demerger or otherwise of an Indian company which was part of erstwhile regulation has been removed from the ‘Debt Instrument Regulations’
Regulation 7 – Taxes and Remittance of sale proceeds.7.1. TaxesAll transaction under these regulations shall be undertaken through banking channels in India and subject to payment of applicable taxes and other duties/ levies in India.7.2. Remittance of sale proceeds(1) No remittance of sale proceeds of a debt instrument held by a person resident outside India shall be made otherwisethan in accordance with these Regulations and the conditions specified in the relevant Schedule.(2) An authorised dealer may allow the remittance of sale proceeds of a debt instrument (net of applicable taxes) to theseller of such instrument resident outside India -Provided –  (i) the instrument was held by the seller on repatriation basis; and (ii) Reserve Bank’s approval has been obtained in other cases for sale of the instrument and remittance of the sale proceeds thereof;(3) An authorised dealer may allow remittances – both inward and outward – related for permitted derivatives transactions.	Regulation 12 – Taxes and Remittance of sale proceeds.12.1 TaxesAll transaction under these regulations shall be undertaken through banking channels in India and subject to payment of applicable taxes and other duties/levies in India.12.2 Remittance of sale proceeds(1) No remittance of sale proceeds of an Indian security held by a person resident outside India shall be made otherwise than in accordance with these Regulations and the conditions specified in the relevant Schedule.(2) An authorised dealer may allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India -Provided—  (i) the security was held by the seller on repatriation basis; and (ii) either the security has been sold in compliance with the pricing guidelines or the Reserve Bank’s approval has been obtained in other cases for sale of the security and remittance of the sale proceeds thereof;	There is no change with respect to provisions for Taxes and Remittance of sale proceeds however, a new provision has been inserted which provides that an authorised dealer may allow remittances – both inward and outward – related for permitted derivatives

Source : PTI