Implementation of System for Monitoring of Foreign Investment in Listed Company

The Foreign Investment in India is regulated in terms of clause (b) of sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017.

FEMA prescribes the various foreign investment limits in listed Indian companies for Foreign Portfolio Investors, Non-Resident Indians and sectoral gaps & compliance thereof.

Brief Introduction of measures by SEBI and RBI

As a purposive drive of Indian Government for keeping the track over the foreign Investment in India and related compliances thereto, the Securities Exchange Board of India (SEBI) in consultation with Reserve Bank of India (RBI) has introduced a new system for Monitoring of Foreign Investment limits in listed companies and prescribed guidelines w.r.t. the necessary infrastructure, data to be provided by listed Indian companies and other related matters.

In nutshell, the SEBI on 5^th April, 2018 had issued circular directing market regulators to put in place a new system for depositories to monitor the foreign investment limits in listed Indian companies and such Indian company to submit the required information for FDI received till date within the specified date.

The circular provided that the last date for submission of data as 30^th April, 2018, however, the stated day has been extended as for submission of information by companies by 15^th May, 2018 and operationalizing the monitoring mechanism by depositories to 18^th May, 2018.

Why monitoring system to be implemented

• The objective is to enable listed Indian companies to ensure compliance with the various foreign investment limits;
• To maintain the data of investment received within the allowed limit of FDI by the foreign investors in India;

 Compliance under the Circulars

For depositories

• The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) shall put in place the necessary infrastructure and IT systems for operationalizing the monitoring mechanism described in Annexure A of SEBI’s circular IMD/FPIC/CIR/P/2018/61 dated 5th April, 2018.
• Depositories shall provide an interface where the company shall submit the requisite information including company identification number, name, date of incorporation, PAN number, Permissible Aggregate Limit for investment by FPIs and Permissible Aggregate Limit for investment by NRIs

 For Stock Exchanges

The Stock Exchanges (BSE, NSE and MSEI) shall also put in place the necessary infrastructure and IT systems for disseminating information on the available investment headroom in respect of listed Indian companies.

For Listed Companies

• In accordance with Para 6 of Annexure A of the circular dated April 05, 2018 which provides the Architecture of the System for Monitoring Foreign Investment Limits in listed Indian companies, requires all listed Indian companies to provide the specified data/ information on foreign investment to the depositories latest by 30th May, 2018 which has been extended to 15th May, 2018.  
• The company shall appoint any one depository to act as a Designated Depository for the purpose of monitoring the foreign investment limit.
• In an event of any change in any of the details pertaining to the company, such as increase or decrease of the aggregate FPI or NRI limits or the sectoral cap or a change of the sector of the company, the firm needs to inform such changes along with the supporting documentation to its designated depository.

Activation of Red Flag Alert

The circular provides that the  system  shall  calculate  the  percentage  of  NRI  &  FPI  holdings and other investment in the Company

If the total foreign investment in a company is within 3% or less than 3% of the sectoral cap, then a red flag shall be activated for that company, where the same shall be displayed by depositories and stock exchanges. Such data shall be updated on day to day basis.

Breach of foreign investment limits

In case of breach of aggregate NRI/FPI investment limits or the sectoral cap for a given company, the depositories shall inform the exchanges about the breach, the exchange issue circular/notification on its website and halt further purchases by FPIs, if the aggregate FPI limit is breached, NRIs, if the aggregate NRI limit is breached or All foreign investors, if the sectoral cap is breached. The circular further provides for manner of disinvestment so as to bring the excess FDI within the limit.

Therefore, in concluding remark it is to be stated that the Circular codifies the process of monitoring foreign investment limits. In case any FPIs/ NRIs who has breached the FDI limit, shall be required to disinvest in the manner as stated in the circular, where such breach will be informed through the custodians/ AD banks respectively along with the method for disinvestment which can opt in accordance with provisions of law.

Relevant links:

SEBI circular no. IMD/FPIC/CIR/P/2018/61 dated 5th April, 2018- https://www.sebi.gov.in/legal/circulars/apr-2018/monitoring-of-foreign-investment-limits-in-listed-indian-companies_38575.html

Circular by NSDL no. Ref No: NSE/CML/2018/11 dated 25th April, 2018- https://www.nseindia.com/content/equities/NSE_Circular_25042018.pdf

RBI Notification no.: - RBI/2017-18/172 A.P. (DIR Series) Circular No. 27 [(1)/20(R)] dated 3^rd May, 2018- https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11270&Mode=0

 Compiled by Ms. Deepika Sharma

(Senior Associate at Factum Legal Advocates & Solicitors)

Import of Goods and Services under FEMA

Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000, Preamble of the FEMA reads as under:

An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India

FEMA provisions relating to import of goods and services are being reproduced below:

Section 2 (p) of FEMA defines import as under:

“import”, with its grammatical variations and cognate expressions, means bringing into India any goods or services;

Section 2(j) of FEMA defines current account transaction as under:

 “current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,—

(i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,

(ii) payments due as interest on loans and as net income from investments,

(iii) remittances for living expenses of parents, spouse and children residing abroad, and

(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children;

Section 2e) of FEMA defines capital account transaction as under:

“capital account transaction” means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6;

From the above definitions of the FEMA, it is understood that the foreign trade including import of goods and services is a current account transaction.

To make payment against the import of goods and services, the importer is permitted in terms of provisions of Section 5 of FEMA to approach the AD bank for purchase of foreign exchange and make remittance for import to the non-resident supplier.

Section 5 of FEMA is as under:

5.  Current account transactions

Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction:

Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.

In terms of Section 46 of FEMA, Central Government has the power to make rules:

46.  Power to make rules

 The Central Government may, by notification, make rules to carry out the provisions of this Act.   Without prejudice to the generality of the foregoing power, such rules may provide for,—

 (a)the imposition of reasonable restrictions on current account transactions under section 5;

(b) the manner in which the contravention may be compounded under sub-section (1) of section 15;

(c) the manner of holding an inquiry by the Adjudicating Authorities under sub-section (1) of section 16;

(d) the form of appeal and fee for filing such appeal under sections 17 and 19;

(e) the salary and allowances payable to and the other terms and conditions of service of the Chairperson and other Members of the Appellate Tribunal and the Special Director (Appeals) under section 23;

(f) the salaries and allowances and other conditions of service of the officers and employees of the Appellate Tribunal and the office of the Special Director (Appeals) under sub-section (3) of section 27;

(g) the additional matters in respect of which the Appellate Tribunal and the Special Director (Appeals) may exercise the powers of a civil court under clause (i) of sub-section (2) of section 28;

(h) the authority or person and the manner in which any document may be authenticated under clause (ii) of section 39; and

(i) any other matter which is required to be, or may be, prescribed.

In exercise of the powers conferred by Section 5 and sub-section (1) and clause (a) of sub-section (2) of Section 46 of the Foreign Exchange Management Act, 1999, and in consultation with the Reserve Bank, the Central Government has made Foreign Exchange Management (Current Account Transactions) Rules, 2000;

Import of Goods and Services into India is being allowed in terms of Section 5 of the Foreign Exchange Management Act 1999, read with Foreign Exchange Management (Current Account Transaction) Rules, 2000. 

Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the FEMA. These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents.

The directions issued on import of goods and services into India have been compiled in this Master Direction on Import of Goods and Services dated January 1, 2016 (Updated as on February 02, 2018).

Import trade is regulated by the Directorate General of Foreign Trade (DGFT) AD Category – I banks are required to ensure that the imports into India are in conformity with the Foreign Trade Policy in force and Foreign Exchange Management (Current Account Transactions) Rules, 2000 and the Directions issued by Reserve Bank under Foreign Exchange Management Act, 1999 from time to time.

AD Category I Banks can allow remittance for making payments for imports into India, after ensuring that all the requisite details are made available by the importer and the remittance is for bona fide trade transactions.

In terms of Section 10(6) of the Foreign Exchange Management Act, 1999 (FEMA), any person acquiring foreign exchange is permitted to use it either for the purpose mentioned in the declaration made by him to an Authorised Dealer Category – I bank under Section 10(5) of the Act or for any other purpose for which acquisition of foreign exchange is permissible under the said Act or Rules or Regulations framed there under.

Where foreign exchange acquired has been utilised for import of goods into India, the AD Category – I bank has to ensure that the importer furnishes evidence of import.

In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc.

AD Category – I banks can consider granting extension of time for settlement of import dues up to a period of six months at a time (maximum up to the period of three years) irrespective of the invoice value for delays on account of disputes about quantity or quality or non-fulfilment of terms of contract; financial difficulties and cases where importer has filed suit against the seller. In cases where sector specific guidelines have been issued by Reserve Bank of India for extension of time (i.e. rough, cut and polished diamonds), the same will be applicable.

While granting extension of time, AD Category –I banks are required to ensure that:

• The import transactions covered by the invoices are not under investigation by Directorate of Enforcement / Central Bureau of Investigation or other investigating agencies;
• While considering extension beyond one year from the date of remittance , the total outstanding of the importer does not exceed USD one million or 10 per cent of the average import remittances during the preceding two financial years, whichever is lower; and
• Where extension of time has been granted by the AD Category – I banks, the date up to which extension has been granted may be indicated in the ‘Remarks’ column in IDPMS.
• Cases not covered by the above instructions / beyond the above limits, may be referred by the AD bank to the concerned Regional Office of Reserve Bank of India.

RBI has also issued Operational Guidelines to the AD banks for matters relating to advance remittances for imports, Interest on Import Bills, Remittances against Replacement Imports, Guarantee for Replacement Import, Import of Equipment by Business Process Outsourcing (BPO) Companies for their overseas sites, Receipt of Import Bills/Documents by the Importer Directly from Overseas Suppliers, Evidence of Import, Import Data Processing and Monitoring System(IDPMS), Follow up for Import Evidence, Import of Gold, Import of Other Precious Metals, Import Factoring, Merchanting Trade, Import Payments through Online Payment Gateway Service Providers and Settlement of Import transactions in currencies not having a direct exchange rate.

Wherever the AD bank feels necessary; it may make a reference to the Reserve Bank seeking instructions in the case.

Compiled by Mr. G. D. Chugh

(Associate Partner in Factum Legal Advocates & Solicitors)