(For Private Circulation Only)

Dr. Shakuntala Misra National Rehabilitation University

Lucknow
FACULTY OF LAW

‘INVESTMENTS & SECURITIES LAWS’

For Students of B. Com., LL.B (Hons.) 8th Semester Only

TOPIC 05: REQUIREMENTS TO DEVELOP UNDERSTANDING OF I&S LAWS

Prepared By:

SHAIL SHAKYA
Assistant Professor (Law) & Faculty In-charge
Faculty of Law, DSMNRU

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

Topics

 Acquaintance with Companies Act, 2013

 Acquaintance with FEMA, 1999

 Acquaintance with SEBI Act, 1994

 Acquaintance with RBI Act, 1934

 Acquaintance with Applicable Miscellaneous Laws

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

01. Acquaintance with Companies Act, 2013

It has been made clear that the major concern of foreign investments in India is based
on the legal foundation that has been prescribed in the Companies Act, 2013. It is therefore
necessary for a reader of the subject that conceptual foundation of Companies Act, 2013 is
sufficiently clear so that better appreciation of concepts in the subject could be accomplished.
Being the parent legislation for organized commercial activity in India, Companies Act, 2013
is related to formation & incorporation of companies in India, share & share capital,
debentures and bonds, accounts & audits, company management and issues connected
therewith or incidental thereto. The legislation has also undergone considerable changes since
its very enactment and has been continuously subject to research and evaluation so that better
framework for companies could be laid down in India. The broad scheme of Companies Act,
2013 is administered by ‘Rules’ that may be formulated by government of India and it should
be noted here that government shall be the sole regulator of all activities relating to
establishment and incorporation of companies in India. 1

Key provision in Companies Act, 2013 relate to definitions of various kinds of

companies incorporated in India 2, provisions relating to issue and allotment of securities,
possibility of mergers of companies across borders3, compliance provisions for listed
companies. It is also important to note here that general power of a company to raise finance
through equity and debt modes is vested with the companies only under the provisions of
Companies Act, 20134 including the general power to issue global depository receipts 5 and
acceptance of deposits6. Since the power of regulation of trading in securities has been given
to Securities & Exchange Board of India, it is pertinently necessary for the readers to
understand that SEBI has power to make regulations for any transaction involving securities
issued by any company incorporated in India. 7 Making all securities transactions to take place
in dematerialized form is another move by government to ensure transparency, accountability
and efficiency in market based operations for the companies. 8

It is the basic foundation of companies Act, 2013 which prescribes that foreign
entities could seek their presence in India either by purchasing shares of an existing company
(equity based investment) or by incorporating a fresh company in India with a supplementing
domestic capital invested by an existing Indian company (called as Joint Venture) or by
incorporating a subsidiary/wholly-owned subsidiary (subject to FDI Policy Norms) company
in India. A learner is expected to go through the incorporation procedure and formalities
connected to incorporation so that a prudent decision regarding the entry mechanism could be
arrived at considering the domestic regulations of various factors in incorporating companies
in India. Comprehensive understanding of mechanisms in Companies Act, 2013 is therefore

1
S. 467- 469 of Companies Act, 2013
2
S. 2(21), 2(22), 2(42), 2(45), 2(62), 2(68), 2(71), 2(85) etc. of Companies Act, 2013
3
Section 234 of Companies Act, 2013
4
Section 23 of Companies Act, 2013
5
Section 41 of Companies Act, 2013
6
Section 73 of Companies Act, 2013
7
S. 24 of Companies Act, 2013
8
S. 29 and S. 40 of Companies Act, 2013

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

required for the reader to become aware that incorporating a company shall not always be
beneficial.

02. Acquaintance with FEMA, 1999

Next in the line for the purposes of foreign investment is most important legislation
entitled as ‘Foreign Exchange Management Act, 1999’ about which necessary information
has been shared in previous pages. However, before getting to develop a hands-on experience
in laws relating to foreign investments in India, it is important to understand the general
scheme of FEMA, 1999. As has been discussed earlier, FEMA was the result of progressive
discussions among various political parties that were looking ahead to economic development
of India by supplementing domestic capital with foreign investments and acquisition of new
forms of technology that could aptly revolutionize the commercial activities in India. The
legislation is related to regulation and management of foreign exchange 9, categorization of
authorized persons to deal in foreign exchange 10, contravention and penalties11, directorate of
enforcement and miscellaneous provisions 12. FEMA has to a great extent removed the
restrictions for transactions in foreign exchange for trade in good and services apart from the
enabling provision for the government to prescribe reasonable restrictions in general public
interest.

Most important provision among the miscellaneous provisions is the power of

Reserve Bank of India (RBI) to make regulations for enforcement of objectives outlined in
FEMA13 and power of central government to lay down rules for the same14. FEMA originally
was enacted with 25 notifications that have come to around 350 amendments since then.RBI
has also introduced master directions on matters related to transactions in foreign exchange
which consolidates instructions, rules and regulations. One master direction is issued for one
subject that includes; inter alia, all instructions on the subject which are subjected to change
as and when the policies get changes corresponding to the decisions of government. RBI also
issues directions to authorized persons 15 as have been named and identified under FEMA,
1999 which are operational instructions to authorized persons by the Reserve Bank of India. 16
Substantial importance is also attached to presumption of residence in India under FEMA and
interpretations to capital and current account transactions between Indian entities and Foreign
entities.

Considering the key features related to eligibility for transaction in foreign exchange,
modalities of regulation & supervision and prescription of contraventions and penalties
makes the legislation significantly important in order to learn operational dynamics of laws
on the subject. Wide objective of the legislation is being achieved by comprehensive

9
Section 3-9 of FEMA, 1999
10
Section 10-12 of FEMA, 1999
11
Section 13-15 of FEMA, 1999
12
Section 30-49 of FEMA, 1999
13
Section 47 of FEMA, 1999
14
Section 46 of FEMA, 1999
15
Under S. 10 (4) and 11(1) of FEMA, 1999
16
Legal validity of these instructions has been upheld in Prof. Krishnaraj Goswami v. RBI [2007] (6) Bom. CR
565

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

regulations framed by RBI and SEBI cumulatively, when it comes to dealing in securities in
terms of foreign exchange. It is therefore important to note here that multi-layered regulation
has been operating in India for the companies willing to either receive foreign investments or
foreign entities willing to establish their operations in India. There may be resort to concepts
not covered under either of the legislations and thus corresponding provisions of other
legislations such as Indian Income Tax Act, 1961 could be made applicable (subject to
modifications) in order to maintain certainty and accuracy of law relating to foreign
investments in India.

03. Acquaintance with SEBI Act, 1994

Adoption of multi-regulatory framework for regulation of an important activity such

as foreign investment has always remained under the scrutiny of commentators and analysts
for a considerable period of time. 17 The story of securities regulation begins with
establishment of Control of capital issues which was introduced through the Defence of India
Rules in 1943 under the Defence of India Act, 1939 to channel resources to support the war
effort.18 Though the stock exchanges were in operation, there was no legislation for their
regulation till the Bombay Securities Contracts Control Act was enacted in 1925. Under the
constitution which came into force on January 26, 1950, stock exchanges and forward
markets came under the exclusive authority of the central government. Following the
recommendations of the A. D. Gorwala Committee in 1951 19, the Securities Contracts
(Regulation) Act, 1956 was enacted to provide for direct and indirect control of virtually all
aspects of securities trading and the running of stock exchanges and to prevent undesirable
transactions in securities.

In 1980s and 19990s, it was increasingly realized that an efficient and well developed
securities market was essential for sustenance of economic growth. A major initiative of
regulation was establishment of a statutory autonomous agency, called SEBI, to provide
reassurance that it is safe to undertake transactions in securities. It was empowered
adequately and assigned the responsibility to (a) protect the interests of investors in securities,
(b) promote the development of the securities market, and (c) regulate the securities market.
Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with securities market. All
market intermediaries are registered and regulated by SEBI. They are also required to appoint
a compliance officer who is responsible for monitoring compliance with securities laws and
for redressal of investor grievances.

Joining the next strand of regulation is Securities & Exchange Board of India Act,
1992 which was established with a view to uphold the interests of investors, promote the
development of securities market and regulate the securities market that has been eventually

17
In proceedings of the National conference on regulation in infrastructure services and the way forward, Role
of Independent regulation of economic reforms available at https://www.teriin.org/upfiles//pub/papers/ft25.pdf
18
The relevant provisions in the Defence of India Rules were replaced by the Capital Issues (Continuance of
Control) Act in April 1947.
19
https://www.epw.in/system/files/pdf/1951_3/40/gorwala_committee_report.pdf

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

so created.20 SEBI has been empowered under the SEBI Act, 1992 to make regulations for
furtherance of objectives outlined in the legislation. 21 Adoption and progressive development
of India saw transfer of powers to SEBI under Securities Contract (Regulation) Act, 1956 for
matters connected or incidental to securities transactions in India. It is therefore important for
a reader of investments and securities laws to understand that although foreign investment is
largely the purview of RBI to regulate, any transaction of securities out of any mechanism
permissible under the Companies Act, 2013 would squarely fall under the jurisdiction of
SEBI as master regulator and therefore its permission, compliances as have been prescribed
and remittance of information is equally important as in the case of RBI. However, the aspect
of multiple regulations of foreign investments through both RBI and SEBI has been subject
of criticism since a long time. To develop understanding in the subject, one cannot sideline
the role of SEBI.

04. Acquaintance with RBI Act, 1934

It is not just about transactions and corporate actions to develop insights to laws of
investments and securities in India but one should also consider the role, responsibility and
functions performed by Reserve Bank of India 22 as a custodian of foreign exchange and
principal regulator of credit and monetary policies for India. The general power of
superintendence that has been vested with RBI in matters related to foreign investments
under FEMA casts a larger responsibility on the regulator to implement measures and issue
directions that best serve the credit worthiness of India. 23 It has been discussed earlier that
with the power being delegated to RBI, it has been put under the duty to perform a diligent
check on investments being made within permissible limits, for the purposes as have been
identified and to perform a systemic risk assessment for the country in debt based borrowings
that create charges on assets of entities in India. 24 RBI has been given authority to make
regulations in relation to foreign exchange transactions and to exercise effective control over
deviations that may result out of investment strategies adopted by the companies. 25

Linked to the power of making regulations for the purpose of administering effective
administration of foreign exchange in India, RBI has a power to take remedial/ corrective
steps to minimize the effects of currency fluctuations, possibilities of market failure and
preservation of foreign reserves to protect the country from going insolvent. Intervention of
RBI as regulator in foreign exchange transactions has been criticized at various occasions by
many commentators for the fact that it appears to have exceeded its purview of regulation and
gets to do over-regulation besides its duty to regulate. It is a fact worth appreciation that all
powers have not been vested with RBI but for example, the power to place restrictions on
capital account transactions has been vested with central government, to be exercised in
consultation with RBI.26 The central bank of India has its own typology of commencing

20
Preamble to SEBI Act, 1992
21
Section 30 of SEBI Act, 1992
22
Established by Reserve Bank of India Act, 1934
23
Preamble of FEMA, 1999
24
See Page Above
25
FEMA, 1999
26
Section 5 of FEMA, 1999

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

intervention in foreign exchange transactions which is dependent on the need and kind of
situation that has arisen.27

It is evident in the discussion made above that as a principal regulator of monetary

and credit policy for India, the regulations of Reserve Bank hold importance as far as
development on the contours of foreign investments is concerned. It is also important to note
here that the complete process of foreign investment starting from putting investments in
India to repatriation of sale proceeds/ profits comes within the jurisdiction of RBI and
therefore, its multifold functions cast significant effects to foreign investments in India.
However, the term ‘speculator’ would be a proper word to describe the roles and functions
performed by RBI as compared to ‘regulator’ for the reason that its major functions are
inclined to derive profits from currency fluctuations. 28 RBI has a role to play in all segments
of foreign exchange markets where any sort of dealing in foreign currency may be conducted
between any class and classes of participants.29

05. Acquaintance with Miscellaneous Laws

Apart from sector specific regulation being put in place by India for matters
connected to foreign investments, the legislative framework is also supplemented by
Prevention of Money Laundering Act, 2002 and the rules as framed thereunder. Money
laundering is defined to mean receiving money out of inappropriate channels of transmission
although for legitimate purposes. 30This goes in line with the rider clause put in place by
FEMA which mandates that all foreign exchange transaction (current or capital account
transactions) shall be performed only by authorized dealers in this regard. 31 Money
laundering is not just an act but is a series of acts performed in such a way that money is
transmitted out of the regular course of transmission. 32 Any remittance of money therefore
outside of the regular modes of transfer would be considered as money laundering.

Another important legal document in the array of foreign investments is

‘Consolidated FDI Policy’ announced every year by Department of Industrial Policies &
Promotion (DIPP) of Ministry of Commerce & Industry. FEM (Transfer or Issue of
Securities by a Person Resident Outside India) Regulations, 2000 is the parent legislation
for consolidated FDI policy in India. Amendments and changes to existing foreign
investment framework are made through the amendment of this regulation which is popularly
called as ‘Consolidated FDI Policy’ for the fact that policies otherwise, do not carry a binding
effect. RBI generally makes adjustments and amendments to the regulations by issue of press
notes although actual amendments to the regulation may be made later which carry a binding

27
Ashima Goyal. The Case for Intervention of RBI in today’s FOREX Market, The Hindu Businesline, available
at https://www.thehindubusinessline.com/opinion/columns/ashima-goyal/the-case-for-rbi-intervention-in-
todays-forex-market/article22994868.ece
28
https://www.dummies.com/education/finance/international-finance/the-roles-of-speculators-and-central-
banks-in-foreign-exchange-markets/
29
http://www.papertyari.com/general-awareness/banking/foreign-exchange-market-india/
30
Section 2(1)(p) of Prevention of Money Laundering Act, 2002
31
See FEMA, 1999
32
Vijay Kumar Singh, Controlling Money Laundering in India, Hidyatullah National Law University, Raipur

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

force of law.33 It is also a fact worth consideration that FDI Policy is a uniform directive for
regulating the foreign investments in India and that any subsequent changes to the policy
statement would be reflective of the broader objectives of the government regarding foreign
investments.34

Most of the aspects of foreign investments are governed by two basic legislations on a
broader perspective such as FEM (Transfer or Issue of Securities by a Person Resident
outside India) Regulations, 2000 and SEBI (Issue of Capital & Disclosure Requirements)
Regulations, 2016 as amended from time to time. But this does not have the effect of putting
essential provisions of Companies Act, 2013 at discretionary disposal; the regulations made
under the respective statutes are merely supplementary and complementary to the essential
legal framework. A thorough analysis of both these regulations reveals that procedural
guidelines are being published separately to regulate the outlines of policy statements and
that the supplementing circulars/ orders or directives aid and implement the framework that
has been formulated on an intelligent basis. Understanding of fundamental structure of both
of these regulations executed by different sector specific regulators is essential in order to
appreciate the spirit and depth of regulation of foreign investments in India. Companies Act,
2013 dictates the overview of procedure for bringing foreign investments to India and other
details and prescriptions are announced depending upon the broader object-oriented ideology
which is guided by sound principles of commercial adventure and undertaking. It should
therefore be kept in mind that all rules are complementary and may to some extent overlap in
operation.

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33
See Sanjana Vijh, validity of Press Notes by DIPP in absence of Subsequent Amendments, available at
https://blog.ipleaders.in/validity-of-press-notes/
34

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU