Online Stores considered as start of business activities; Insurance Intermediaries under 100% automatic route; FPI Divestment incase of excess holding

[Second Amendment to Foreign Exchange Management (Non-Debt Instruments) Rules, 2019]

Foreign investments in India have always been regulated since beginning. Supervision on such investments has seen a phase of liberal view as opposed to restricted view applicable in the earlier years. Hence, with a constant need to align the rules to accommodate the changing cross border investments trend, the Ministry of Finance (“MoF”) has come up with second amendment on the recently notified Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“Principal Rules”) vide issue of notified Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules, 2020 (“Amendment Rules”) on April 27, 2020.

Following are the key elements in the Amendment Rules:

1.     Acquisition after renunciation of rights

Second Amendment Rules

This is new provision introduced in the Principal Rules ,which will enable a person resident outside India to acquire a right from a person resident in India who has renounced it and consequently may acquire the equity instruments (other than share warrants) subject to the pricing guidelines.

Principal Rules

No such provision

2.     Applicability of sourcing norm in case of single brand retail trade

Second Amendment Rules

Sourcing norms are exempted upto three years from the commencement of business, i.e from the opening of first store or start of online retail, whichever is earlier, for entities undertaking, single brand retail trading of products having ‘state of art’ and ‘cutting edge technology’ and where local sourcing is not possible.

Online retail has been permitted to such entities vide amendment notified on December 5, 2019 in addition to brick and mortar stores.

This move seems to be just and appropriate as the timeline for exemption of sourcing norms immediately begins as soon as the entity commences to operate commercially in Indian markets, whether by way of physical store or online retail, as the case may be.,

Principal Rules

Earlier sourcing norms were exempted upto three years from the commencement of business, i.e from the opening of first store for the said entities.

3.     Foreign Investment in Insurance sector

Second Amendment Rules

-Insurance Intermediaries have been segregated as a separate class for the purpose of receipt of foreign investments. However, Insurance Company continues to be a sector in which 49% foreign investment is allowed under automatic route.

These intermediaries include insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, Surveyors and Loss Assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority of India from time to time.

Subject to the FDI linked conditions, as detailed in the Amendment Rules, Foreign investments in such entities is allowed under 100% automatic route.

Principal Rules

·   Insurance Company and intermediaries formed part of same sector with 49% foreign investment under automatic route.

Second Amendment Rules

-Foreign Investment in Insurance company i.e. upto 49% automatic route will be allowed subject to approval/ verification by the Insurance Regulatory and Development Authority of India.

Principal Rules

·   No such approval or verification requirement under the automatic route.

Second Amendment Rules

-The insurance intermediary that has majority shareholding of foreign investors is required to undertake/ comply with the specified set of parameters with respect to repatriation of dividend, disclosure norms, etc.

Due to the constant increase in foreign investment in the sector of insurance intermediaries in the past few years, MoF has recognized the need to liberalize the quantum of foreign investments in India and at the same time prescribed certain set of additional parameters to safeguard the interest of insurance holders to attain the twin benefit.

Principal Rules

·   No such parameters were prescribed in the Principal Rules.

4.     Divestment of excess holdings by FPIs

Second Amendment Rules

At present, the FPIs investing in breach of the prescribed limit may divest their holding within 5 trading days from the settlement date. In case of its failure, entire holding by such FPI and its investor group shall be reckoned as foreign direct investment, and restricting any further portfolio investment in the concerned company.

The Amendment Rules provide that the divestment of holdings by the FPI and the reclassification of FPI investment as FDI shall be subject to further conditions, if any, specified by Securities and Exchange Board of India (“SEBI”) and the Reserve Bank of India (“RBI”) in this regard.

This is an additional specification where MoF has referred the FPIs and its investor group to refer the conditions prescribed by SEBI or RBI, if any, providing for the disinvestment of the excess investments. 

Principal Rules

Principal Rules do not provide any reference to SEBI or RBI to provide for additional conditions in case of divestment.

Click here to download the notification:https://www.egazette.nic.in/WriteReadData/2020/219200.pdf

Authors: I Abhishek Bansal, Partner ([email protected]) I Laxmi Sinha, Senior Associate ([email protected]) I ACUMEN JURIS (www.acumenjuris.com) I

Practice Areas: I Corporate & Commercial I Acquisitions & Investments I Arbitration & Dispute Resolution I

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