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August 31, 2008

Recent Amendments in Foreign Investment Reporting Norms

By Rajesh Begur, Partner, A.R.A. Law

In comparison to most emerging economies, India has one of the most transparent foreign investment policies. The Indian regulatory authorities constantly make an effort to modify the regulations keeping in mind both the domestic and global markets. The change in the outlook of the Indian Government with respect to foreign investment in the past few years has been rather significant and its impact cannot be ignored.

Foreign investment in India is freely permitted in most sectors and its scope has been increased further with the recent amendments made by the Reserve Bank of India (RBI) vide Master Circular dated July, 2008. In addition to the existing list of sectors in which foreign investments is permitted, foreign investors can now invest in small scale industrial units, Asset Reconstruction Companies (ARCs) (registered with RBI), infrastructure companies and commodity exchanges. The flow of foreign investment in sensitive sectors such as airports and ports may be taken off from the automatic route once the proposed umbrella law for scrutinizing the Foreign Direct Investment (FDI) from the national security angle is put in place. At present 100% FDI is allowed with respect to ports and 74% with respect to airports.

But recently certain measures have been taken to monitor the inflow of funds into India. This is evident from the changes that have been incorporated in both the Master Circular and the FC-GPR Form. An Indian company issuing shares and convertible debentures to non-residents under both the routes (i.e. automatic and approval) is required to submit the details of the investment in a two-stage reporting procedure. In the first stage, the receipt of funds has to be reported to RBI within 30 days. In the second stage, the company has to file form FC-GPR with RBI within 30 days from the date of issue of shares/convertible debentures.

In order to clarify and capture the details of FDI in a more comprehensive manner, the form was revised and the following changes were incorporated:

I. Part A

• With respect to reporting of shares and convertible debentures, additional categories such as conversion against import of capital goods by units in SEZ and Share Swap have been included to specify the nature of the issue. The list already included IPO, FPO, and Preferential Allotment.

• Previously the Investor categories was limited to Foreign Nationals and Companies, FII’s, FVCI’s, NRI’s, PIO’s but now it is interesting to note that the classification has been broadened to include Foreign Trusts, Private Equity Funds, Pension & Provident Funds, Sovereign Wealth Funds, Partnership/Proprietorship Firms.

• Besides a certificate from the Company Secretary, a certificate from the Chartered Accountant/Statutory Auditor is also required indicating the manner of arriving at the price of the shares issued to the person resident outside India.

• A Unique Identification Number has been issued for all remittances received as consideration for issue of shares/convertible debentures by RBI.

II. Part B

• Part B has to be filed directly with the RBI on an annual basis, and the date of filing of Part B of the form has been extended from June 30 of every year to July 31.

• The company depending on whether it is listed or unlisted would now also have to specify the market value per share and the net asset value as per the latest balance sheet.

• Shareholding as at the end of March would also have to be disclosed according to the classification as specified in Part A of the form.

• At the time of reporting, a KYC report on the non-resident investor from the overseas bank remitting the amount and a copy of the FIRC/s evidencing the receipt of the amount of consideration is also to be submitted.

With respect to venture capital funds, additional disclosures regarding the details of investment received in units of such funds from FVCIs have been proposed to be included. SEBI may also establish a new screening mechanism for all pending and future FVCI proposals, on the recommendation of RBI. The setting up of the Venture Capital Association of India (VCAI) would also be beneficial in obtaining more information about this sector.

RBI’s objective behind changing the reporting and disclosure norms is:
• With regard to the restrictions that may be imposed on FVCIs, that it will help to prevent low capital base, circumvention of takeover guidelines and round tripping of investments.
• Essentially to observe the type of investors investing and the amount of investment being invested by them.
• At a later stage based on the analysis of the information gathered, new norms and regulations could be introduced.
• This may lead to the imposing of a greater number of restrictions on foreign investments (this may soon be the case with FVCI’s).
• In such a case, inflow of foreign funds into India could take a beating and have a negative impact on foreign investments.

In India investments made through private equity and venture capital funds are not strictly regulated. The introduction of these amendments to the existing law could change that and it could lead to a greater degree of monitoring and interference from the regulatory authorities. This may not necessarily be beneficial and could cause more delays and road blocks for such investments. But the impact can be ascertained only after a certain period of time because they can be imposed only after the authorities succeed in profiling the classes of investors and identifying the share of each investor in the inflow of funds. Till such a time, an attempt to predict the impact of these changes would be a futile exercise.

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