The Central Government vide notification dated 27 April 2020 has made certain amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (hereinafter referred to as 'rules'). We have summarized the gist of amendments in the table below:
| Particulars | Gist of Amendment |
| Applicability of pricing guidelines to rights issue
which is renounced in favor of person resident outside
India |
A new rule 7A has been inserted, providing that the pricing
guidelines shall apply if rights issue of equity instruments is
renounced by a person resident in India in favor of a person
resident outside India. This would mean the following:
|
| Changes to the reckoning of the period for sourcing
norms under single-brand retail |
Under the single-brand retail trading, further clarity is
brought to the reckoning of the period for complying with the
sourcing norm. Earlier sourcing norms were not applicable for up to
3 years from the commencement of business, i.e.,
opening of the first store. Now sourcing norms shall
not be applicable up to 3 years from the commencement of business,
i.e., opening of the first store or the start of online
retail whichever is earlier. |
| Changes in FDI limit in the insurance
sector |
Pursuant to changes in the insurance sector, it has been carved
out in two activities, namely, FDI in 'insurance
company' and 'intermediaries or
insurance intermediaries, etc.' Whilst FDI in 'insurance company' remains unchanged with a sectoral cap of 49% under the automatic route, FDI in 'intermediaries or insurance intermediaries, etc.' has been liberalized by allowing 100% foreign investment under the automatic route. The insurance company shall not allow the aggregate holdings by way of total foreign investment in its equity shares by foreign investors, including portfolio investors, to exceed 49% of the total paid-up capital of such an insurance company. The foreign investment in intermediaries or insurance intermediaries shall be governed by the same terms as provided under rules 7 and 8 of the Indian Insurance Companies (Foreign Investment) Rules, 2015, as amended from time to time. Further, the condition of 'owned and controlled by Indian resident entities' is relaxed in the case of 'intermediaries or insurance intermediaries, etc.' Additionally, certain conditions are prescribed for insurance intermediary that has a majority shareholding of foreign investors. |
| Changes to conditions in case of breach by Foreign Portfolio Investor (FPI) | An amendment to Schedule II is made to conditions prescribed in
case a FPI breaches the investment limit. As per the amendment, the divestment of holdings by FPI and reclassification of investment held by such FPI into FDI shall be subject to additional conditions as may be specified by SEBI and RBI in this regard. |
Our Comments
The renunciation of rights shares by a person resident in India in favor of a person resident outside India will require to adhere to pricing guidelines, i.e., the fair value principle. The changes to the insurance sector have liberalized FDI in insurance intermediary, allowing them to have 100% FDI under the automatic route. Also, the clarification brought in relation to single-brand retail shall clear the ambiguity for the retail organizations operating in the Indian market through online trading. It is further stipulated that SEBI and RBI shall prescribe additional conditions for disinvestment of holdings by FPI, which was acquired in breach of the investment limit. Accordingly, the additional conditions by said regulators are expected separately.
Originally published 29 April, 2020
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