Executing the FEMA compliance before acquisition of securities

A.?????Foreword:-

Ministry of Corporate Affairs (MCA) altered Companies (Share Capital and Debentures) Rules, 2014 and Companies (Prospectus and Allotment of Securities) Rules, 2014 (hereinafter referred as “Cos Act Rules”) to implement the amendment made in FEMA (Non-Debt Instruments) Rules, 2019 in April 2020 that were established for restricting opportunistic takeovers/acquisitions of Indian Companies. ?

B.?????Background: -

Lately MCA has registered over 700 cases across the country against the companies who have Chinese Nationals as Promoters and/or Directors which recorded suspicious transactions and/or doubtful credentials. There have been news across on various social media platforms and other communication channels about FIRs being lodged against foreigners for violation of laws of registration of new companies in India and fraudulently becoming directors of Indian Companies, most of the persons amongst them being from China.

C.?????Why the amendment: -

In April 2020, the above stated FEMA Rules were amended, pursuant to which an entity of a country, sharing land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can make investment in India only under the Government Approval route.

Under the Companies Act, 2013, incorporation of a new company is subject to approval of Central Registration Centre (CRC) set up by the Ministry of Corporate Affairs, where the above-mentioned prohibition can be checked and ensured by Government. However, similar check cannot be done by the Government at the time of issuance of new shares or transfer of shares, in situations where the Indian company is under automatic route for foreign direct investment under FEMA.

To address the stated challenges, MCA amended the Companies Act Rules for issuance of new shares to the effect that no offer or invitation of any securities through private placement shall be made to a body corporate, or a national of, a country which shares land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with private placement offer cum application letter.

MCA has equally amended the Rules under the Companies Act relating to issuance of new shares and relating to transfer of shares, wherein declarations are added in share transfer deed (Form SH-4) format and checkboxes have been introduced in offer letter cum application (Form PAS-4) format. The Declarations/Checkboxes mentions about whether applicant/transferee is mandated to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to transfer/subscription of shares, as the case may be. If so, copy of approval is required to be attached to the share transfer deed OR share subscription form and if the same is not applicable, a confirmation stating that approval is not required to be obtained.

D.????Impact Analysis: -

·???Prior Government Approval under the above-mentioned FEMA Regulations shall be obtained in case company intends to offer securities on private placement (u/s 42 of the Act) to the national of or any body corporate assimilated in a country sharing land borders with India.

·???Allottee to attach the above approval with application form given to issuer company while applying for issuance of new shares through Private Placement Offer cum Application (PAS-4)

·???In case of transfer of existing shares, the transferee has to attach the above approval to the Share transfer deed (SH-4) while registering with the Indian company for transfer or shares

·???If the above Government Approval is not applicable, then confirmation that the Approval requirement was not applicable is to be ticked in the application form / share transfer deed, on case to case basis.

·???Violations shall attract penal provisions under relevant sections of the Act.