In exercise of the powers conferred by clause (a) of sub-section (3) of section 6 and section 47 of the Foreign Exchange Management Act 1999, (42 of 1999) and in supersession of Notification No. FEMA19/ RB 2000 dated 3rd May 2000, as amended from time to time the Reserve Bank of India makes the following regulations relating to transfer or issue of any foreign security by a person resident in India, namely:
In these Regulations, unless the context otherwise requires:
a. ‘Act’ means Foreign Exchange Management Act, 1999, (42 of 1999):
b. ‘authorised dealer’ means a person authorised as an authorised dealer under sub section (1) of section 10 of the Act;
c. ‘American Depository Receipt’ (ADR) means a security issued by a bank or a depository in United States of America (USA) against underlying rupee shares of a company incorporated in India;
d. ‘Core Activity’ means an activity carried on by an Indian entity turnover wherefrom constitutes not less than 50% of its total turnover in the previous accounting year;
e. ‘Direct investment outside India’ means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment.
f. ‘Financial commitment’ means the amount of direct investment by way of contribution to equity and loan and 50 per cent of the amount of guarantees issued by an Indian party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary;
g. ‘Foreign Currency Convertible Bond’ (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency;
h. ‘Form’ means the forms annexed to these Regulations;
i. ‘Global Depository Receipt’ (GDR) means a security issued by a bank or a depository outside India against underlying rupee shares of a company incorporated in India;
j. ‘Host country’ means the country in which the foreign entity receiving the direct investment from an Indian party is registered or incorporated;
Prohibition on issue or transfer of foreign security
Save as otherwise provided in the Act or rules or regulations made or directions issued thereunder, no person resident in India shall issue or transfer any foreign security: –
Provided that the Reserve Bank may, on application made to it, permit any person resident in India to issue or transfer any foreign security.
Prohibition on Direct Investment outside India
Save as otherwise provided in the Act, rules or regulations made or directions issued thereunder, or with prior approval of the Reserve Bank,
(1) no person resident in India shall make any direct investment outside India; and
(2) no Indian party shall make any direct investment in a foreign entity engaged in real estate business or banking business.
.Investment in Financial Services Sector
(1)Subject to the Regulations in Part I, an Indian party may make investment in an entity outside India engaged in financial services activities:
Provided that the Indian party
i. has earned net profit during the preceding three financial years from the financial services activities;
ii. is registered with the regulatory authority in India for conducting the financial services activities;
iii. has obtained approval from the concerned regulatory authorities both in India and abroad, for venturing into such financial sector activity;
iv. has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.
(2) any additional investment by an existing JV/WOS or its step down company in the Financial Services Sector shall be made only after complying with the conditions stipulated in sub-clause (1).
Approval of the Reserve Bank in certain cases
(1) An Indian Party, which does not satisfy the eligibility norms under Regulations 6 or 7 or 8, may apply to the Reserve Bank for approval.
(2) Application for direct investment in Joint Venture/Wholly Owned Subsidiary outside India, or by way of exchange for shares of a foreign company, shall be made in Form ODI, or in Form ODB, as applicable.
(2A) An application made under sub-regulation (2) in Form ODI
(a) for the purpose of investment by way of remittance from India, in an existing company outside India, shall be accompanied, by the valuation of shares of the company outside India, made-
(i) where the investment is more than USD 5 (five) million, by a Category I Merchant Banker registered with SEBI or an Investment Banker/Merchant Banker registered with the appropriate regulatory authority in the host country; and
(ii) in all other cases, by a Chartered Accountant or a Certified Public Accountant.
(b) for the purposes of investment by acquisition of shares of an existing company outside India where the consideration is to be paid fully or partly by issue of the Indian party’s shares, shall be accompanied by the valuation carried out by a Category I Merchant Banker registered with the SEBI or an Investment Banker/Merchant Banker registered with the appropriate regulatory authority in the host country.
(3) The Reserve Bank may, inter alia, take into account following factors while considering the application made under sub-regulation (2):
a. Prima facie viability of the Joint Venture/Wholly Owned Subsidiary outside India;
b. Contribution to external trade and other benefits which will accrue to India through such investment;
c. Financial position and business track record of the Indian Party and the foreign entity;
d. Expertise and experience of the Indian Party in the same or related line of activity of the Joint Venture or Wholly Owned Subsidiary outside India.