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29 April 2020
Government amends rules governing Foreign Direct Investment
 
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:
  1. in case of an unlisted Indian company, the price of equity instruments shall be fair value worked out by a Chartered Accountant, Cost Accountant, or SEBI Registered Merchant Banker on the basis of internationally accepted pricing methodology for valuation.
  2. in case of a listed Indian company, the price of an equity instrument shall be in accordance with SEBI guidelines.
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. 
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