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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)