RBI INBOUND REGULATIONS

SUBJECT: LRM
A019 Sachidanand Kandloor
Guiding Prof: Shrikant Aithal

Contents
INTRODUCTION.................................................................................................................................2
OBJECTIVES...................................................................................................................................2
INVESTMENT BY PERSON RESIDING OUTSIDE INDIA..............................................................3
CONDITIONS TO INVESTORS......................................................................................................3
INVESTMENTS OF PERSON RESIDING OUTSIDE INDIA........................................................3
SCHEDULE 1.......................................................................................................................................4
FOREIGN VENTURE CAPITAL INVESTOR.....................................................................................5
SCHEDULE 7...................................................................................................................................5
DOWNSTREAM INVESTMENT AND OTHER PROVISIONS.........................................................5
CONVERTIBLE NOTES..................................................................................................................5
DOWNSTREAM INVESTMENT........................................................................................................6
CASE STUDY OF RELIANCE JIO......................................................................................................7

INTRODUCTION
Foreign Exchange Management Act, 1999 (FEMA) which was enacted by the Parliament has
substituted the Foreign Exchange Regulations Act, 1973. FEMA came into effect on 1st June,
2000. The importance of foreign exchange reserves was felt by the Exchange Control of India
in the year 1939 as there was a huge shortage of it. Various rules became a necessity for the
system of exchange control and were brought under the Defense of India Act, 1939. Foreign
Exchange Regulation Act, 1947 was adopted on a temporary basis for initial 10 years because
the foreign exchange predicament continued for a long time. Though, the purpose of Act for
foreign exchange crisis did not bring any variation in economic development, nor it brought
back to normal. Considering the difficulty, FERA was entered perpetually in the law since the
year 1957. The Act was a good support for the economic system and shortage of foreign
exchange was brought back to normal. There was also need for various amendments as well
as new rules which needs to be made; the Act was replaced with Foreign Exchange
Regulations Act, 1973 which came into force from 1st January, 1974.

During the 1990s, new approach was brought towards the external sector where the economic
reforms brought huge changes. In the year 1991 financial investments were allowed in
various segments because of economic liberalization policy which was brought in by the
Government of India. Due to this there was an upturn in the flow of foreign exchange in India
and also in the foreign reserves. In some kinds of payments FERA prescribed strict rules
which were affecting the foreign exchange situation. Due to such rules, foreign exchange and
various securities which were indirectly affected the foreign exchange and the import and
export of currency. There was a need for new act which can regulate payments and also bring
a proper import and export of currency so that the foreign exchange reserves in country grow
at a good pace. FERA was than repealed in the year 1999 under the government of Atal
Bihari Vajpayee who replaced it by the Foreign Exchange Management Act, 1999 which
came into force in 1st day of June, 2000. This Act relaxed foreign exchange controls and even
gave some limitations to some kinds of foreign investments. The research will thereby
conclude by the giving certain suggestions as per required. The research project will cover the
rules of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 where the rules
for a person who is residing outside India for investing will be studied. Further it will help us
to understand investment by Foreign Portfolio Investor (FPI) and Down-stream investment
will also be studied in detail. Further, suggestion what can be done by taking various
measures will also be noted and will conclude as per required.

OBJECTIVES
FEMA was mainly introduced in India to ease all the import and export trade or payments
and for safeguarding foreign exchange market. Foreign exchange transactions are classified
into two parts i.e. Capital Account transactions and Current Account transactions and FEMA
frameworks the procedures to transact in India. FEMA can even support as well as amend the
law relating to foreign exchange with the objective of properly maintaining the forex market
in India. The objective of FEMA is to eliminate inconsistency of payments in India and
maintain a proper flow of foreign exchange. Further, dividing the instruments into non-debt
and debt instruments and for knowing the rules separately, thus the Reserve Bank of India
prepared separate rules which provides in detail requirements for investments in India.

INVESTMENT BY PERSON RESIDING OUTSIDE INDIA

Foreign Emergency Management Act, 1999 (FEMA) looks after the foreign exchange
transactions, cross border funds and even trade between the resident and non-resident of
India. FEMA is a short Act, having 49 sections and operating of FEMA is similar to any other
commercial law. FEMA has various guidelines and also rules which need to be followed. If
the guidelines are not followed or if the transactions fall outside the limit, one needs to obtain
permission for it. If there is any violation to the guidelines then the result is penalty.
Prosecution can also take place if the penalty is not paid within the specified period of time.

Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 also known as (NDI
Rules) was notified by the Central Government on 17th October, 2019 by superseding
Foreign Exchange Management (Transfer of issue of security by a person resident outside
India) Regulations, 2017 (TISPRO) and also Foreign Exchange Management (Acquisition
and Transfer of immovable property in India) Regulations, 2018. Further for putting things in
a proper manner Foreign Exchange Management (Debt Instruments) Regulations, 2019 was
also have been notified by the Reserve Bank of India by superseding the above regulations.

CONDITIONS TO INVESTORS
No Venture capital fund or association of firm or any Indian entity must receive any type of
investment in India from a person who is residing outside India unless the Reserve Bank of
India allows such entity or association who made an application with sufficient reasons.
Further any investment which is made from outside India has to check all proper sectoral
caps, entry routes or the limits as the case may be.

INVESTMENTS OF PERSON RESIDING OUTSIDE INDIA

A person outside India can invest in India by either purchasing, selling equity instruments of
Indian company or by subscribing and which is as per the conditions which are specified in
the Schedule. Further any citizen of Pakistan must invest only from Government route in
activities which are other than space, defence, atomic energy or any other such activities
which are restricted for foreign investment. Also, in the event for transfer of ownership of
future foreign direct investment (FDI) which results directly or indirectly in beneficial
ownership and falls within the restriction needs to be also require Government approval.

A person residing outside India who is having investment in India can make equity
instruments which are issued by such companies who is issuing right or bonus issue provided
the offer which is made by the Indian company should be as per the provisions of Companies
Act, 2013 and the issue made should not breach the sectoral cap. Mode of payment shall be
as per the Reserve Bank of India as specified.

Employees’ stock option or sweat equity shares can also be issued by the Indian company to
its employees or directors of its joint venture or overseas subsidiary who are residing outside
India.

A person outside India who is holding equity instruments or units of an Indian company can
transfer in compliance by the conditions specified in the Schedule and which are subject to
terms which is if a person who is residing outside India and not being an overseas citizen can
transfer by way of sale or gift such equity instruments or units of Indian company to any
other person outside India provided if the company is engaged in such sectors which need
Government approval than prior approval of government is a must. Further through a
recognised stock exchange in India a person who is residing outside India can and holds units
or equity instruments of an Indian company can sell to a person who is residing in India or
can also transfer by way of gift or sale provided, the transfer of sale should be subject to
documentation, pricing guidelines as well as reporting requirements specified by the Reserve
Bank of India.

A person residing outside India who holds such equity instruments which contains an
optionality clause and while exercising the option or such right, can exit without any confirm
return which are subject to the pricing guidelines and also minimum lock-in period or lock-in
period of one year whichever is higher as prescribed in these rules. Further an amount of not
exceeding twenty five percent can be transferred between a person resident and outside India
of equity instruments. It needs to be paid on deferred basis by the buyer within eighteen
months from the date of agreement of transfer or can be settled through escrow arrangement
between buyer and seller within eighteen months or may be indemnified by the seller within
eighteen months from the date full consideration is paid.
SCHEDULE 1
Foreign Direct Investment is restricted for sectors such as gambling, nidhi company, chit
funds, Lottery business which includes both private as well as government, trading in
transferable development rights, real estate business, manufacturing of cigarettes, cigars,
activities which are not open for private investment i.e. atomic, railway, collaborations of
foreign technology which includes in any form such as licensing for franchise, management
contract, trade mark also restricted for lottery business.

Following is the some of the important sector with their entry route and sectoral cap which
are mentioned –

a) Agriculture and Animal Husbandry which includes horticulture, floriculture and

cultivation of vegetables, production of planting materials and seeds, services relating
to allied and agro sectors have a sectoral cap of 100% and their entry route is
automatic i.e. investment by the person residing outside does not need permission from
the Reserve Bank of India.
b) Subject to the conditions which are stated in the Schedule 2 a portfolio investor can
purchase instruments of equity of an Indian company which is listed on recognised
stock exchange. Further an investor can also hold or sell Indian Depository Receipts
(IDRs) of a company outside India and issue in Indian market
c) Government approval must be taken for transferring if the company is working in the
sector which needs government approval and apart from this other holding of equity
instruments can be transferred in compliance with the conditions. As per Foreign
Exchange Management (Transfer of issue of security by a person resident outside
India) Regulations, 2017 the average limit made by FPI’s in an Indian company was
24%. Initially it was deleted in the Non-Debt Instruments Rules and then restored by
the Amendment Rules. The rules brought a substantial change in Schedule 2 effective
from April 1, 2020 the aggregate limit would be the sectoral cap which will be
applicable to the Indian company. The company with the approval of Board of
Directors, by special resolution and resolution respectively reduce the limit before
March 31st, 2020 to a low threshold of either 24%, 49%, 74% as may deemed fit or by
increasing the average limit to 49% or 74% or the sectoral cap as deemed fit. Once
such aggregate limit is increased it cannot be reduced later.

FOREIGN VENTURE CAPITAL INVESTOR

An investor can do investments subjects to the conditions which are specified in Schedule
7. A foreign venture capital investor who is holding of Indian company equity instruments
can transfer such units in compliance with the conditions, which is prescribed in Schedule
7 and also by Reserve Bank of India and Securities and Exchange Board of India.

SCHEDULE 7
The sectors which are allowed for a Foreign Venture Capital Investor are – i.
Biotechnology ii. Nanotechnology iii. IT relating to software and hardware development
iv. Research and development of chemical entities in pharmaceutical sector v. Seed
 research and development vi. Poultry industry vii. Dairy industry viii. Infrastructure sector
ix. Production of bio-fuels x. Poultry industry xi. Hotel convention centres with a capacity
of seating more than three thousand.

DOWNSTREAM INVESTMENT AND OTHER PROVISIONS

CONVERTIBLE NOTES
A person residing outside India other than the citizens or entity of Pakistan or Bangladesh can
by an Indian start-up company purchase convertible notes[15] for an amount of twenty five
lakh rupees or more. Further such start-up company who is engaged in sector where
investment is from person residing outside India require prior Government approval and then
can issue such convertible notes and should be in compliance with sectoral caps, entry route,
pricing guidelines and such other conditions for investment. Mode of payment must be as per
the Reserve Bank of India. A person resident outside India can transfer by convertible notes,
sale to/ from a person residing in/or outside India provided such transfer takes place with
respect to entry routes and pricing guidelines.

MERGER OR AMALGAMATION OF INDIAN COMPANIES

When a scheme for amalgamation or merger of two or more companies or reconstruction
through demerger which is approved by National Company Law Tribunal (NCLT) or such
competent authority, the new company can issue equity instruments to existing holders of
transferor company residing outside India with subject to the conditions i.e. the transfer
should be in compliance with the sectoral caps, entry routes and conditions of investment by
the person residing outside India. Provided if the percentage can breach the conditions or
sectoral caps then the transferee or transferor company may obtain all required approval from
the central government. The person residing outside India should not engage in sectors which
are restricted with the transferor or transferee company.

PRICING GUIDELINES

Firstly the guidelines which are will be specified shall not be applicable for the transfer
through sale which is in accordance with the Securities and Exchange Board of India. The
prices of instruments of equity of an Indian Company shall be unless otherwise specified in
such rules shall not be less than the working out of prices with accordance to the Securities
and Exchange Board of India in the case of listed Indian company or if company is going by
way of delisting process which is as per the Securities and Exchange Board of India
(Delisting of Equity Shares) Regulations, 2009 and the valuation done for any international
pricing methodology on arm’s length and duly certified by Merchant Banker or Chartered
Accountant who are registered with the Securities and Exchange Board of India.

If a transfer is made by a person residing outside India to person residing in India and vice
versa specified in such rules shall not be less than the working out of prices with accordance
to the Securities and Exchange Board of India in the case of listed Indian company or if
company is going by way of delisting process which is as per the Securities and Exchange
Board of India (Delisting of Equity Shares) Regulations, 2009 and the valuation done for any
international pricing methodology on arm’s length and duly certified by Merchant Banker or
Chartered Accountant who are practising as Cost Accountant or who are registered with the
Securities and Exchange Board of India.

DOWNSTREAM INVESTMENT
It is an investment which is made by a company through acquisition of shares or control or
subscription in another company. Investing in other downstream company by a company who is
already having foreign investment is known as downstream investment which is subject to control and
ownership. As per RBI, the first Indian company has accepted foreign investment and is making
investment in second Indian company.

Foreign direct investment applies norms to both direct as well as indirect investments into
Indian companies. If there is a direct investment, then the non-resident owner will invest
directly in Indian company. Indirect FDI also known as downstream investment which is
made by an Indian company, controlled and owned by non-residents in other Indian company.
It needs to follow norms which are applicable to direct FDI with respect to sectoral caps,
entry route and other conditions. The other Indian entity receiving foreign investment should
not be controlled or owned by Indian resident citizens or controlled by person residing
outside India

Such downstream investment are subject to conditions which include permission of Board of
Directors, funds requirements for investments which needs to be brought from abroad and
pricing guidelines. Further the reporting requirements shall be as per the Reserve Bank of
India in Foreign Exchange Management (Mode of Payment and Reporting of Non-debt
Instruments) Regulations, 2019 a person residing in India shall follow the pricing guidelines.
The Indian company or the first company who is making downstream investment will be
responsible for compliance with these rules. Such company needs to have a certificate with
effect from the auditor on annual basis and such regulations compliance must be mentioned
in Annual report. If auditor gave qualified report, then the company needs to obtain
acknowledgement from Regional office of the Reserve Bank of India. The company who is
making investment must further file Downstream Investment form with the Reserve Bank of
India along with the mode of payment and reporting guidelines within the period of 30 days
from allotting the equity instruments and also notify the Secretariat for Industrial Assistance
DPIIT within 30 days of investment.

CASE STUDY OF RELIANCE JIO

INTRODUCTION

Reliance Jio Infocomm Limited was established in the year 2007. In the year 2010, it
purchased 95% of Infotel Broadband Services Limited (IBSL). The reason for purchasing
such less known company is the opportunities and services which is offered in the price tag.
IBSL is thus one of the reasons which permitted Reliance in developing 4G network all over
the country. The first product which was launched in the year 2015 was Lyf smartphone and
this product was highly hyped and advertised did not reach that point of expectations and
failed in generating enough demand. In the year 2016 Ambani announced first his plans in
taking over the 4G in India by the launch of Reliance Jio.

RIGHT ISSUE

With the plan in making Reliance full debt free by March 2021, he completed such target
within 9 weeks. Through two sources the funds was raised. By the issuing of right issue i.e.
offering of shares to the existing shareholders at a discount and such issue was
oversubscribed by 1.59 times and raised more than 53 thousand crores. Secondly majority of
funds came from the sale of stake in Jio platform. Total of 24.7% is sold to foreign investors
such as Facebook (9.99%), Vista Equity Partner (2.32%), Silver Lake (2.08%), Public
Investment Fund (2.32%), KKR (2.32%), Mubadala (1.85%), General Atlantic (1.34%), Abu
Dubai Investment Authority (1.16%), TPG and L Catterton which have the stake of 0.93%
and 0.39% respectively. An amount of Rs. 78,500 crores has been raised from such investors
and the remaining is retained by Reliance industries.

OVERSEAS LISTING

An Initial Public Offer (IPO) of Jio by selling 20-25% is planned by Reliance Industries
Limited (RIL) mostly in National Association of Securities Dealers Automated Quotations
(NASDAQ) are been said in various reports. Indian Inc. is gaining a lot of transaction
through overseas listing. For managing Indian start-ups as well as specialised sectors for
raising capital by overseas efficiently, Finance Minister Nirmala Sitharaman had said that in
permissible jurisdictions listing of securities can be directly done by the Indian public
companies. After all necessary regulations permitting overseas directly by Indian entity will
be expected soon after amendments are passed to the Foreign Exchange Management Act
regulations and Companies Act. Currently Indian companies who are planning in raising
funds in overseas stock markets are permitted to do so through American Depository Receipts
(ADR) and Global Depository Receipts (GDR). The companies must have shares trading in
domestic market complying with domestic market regulations. Most likely, Morgan Stanley
will be appointed as the lead banker in managing overseas listing while Citibank and Bank of
America Merril Lynch can also be roped for the IPO.

When Reliance will start its listing process, New York Stock Exchange (NYSE) and
NASDAQ wants such norms from companies who are wishing to list on their platforms- As
per NYSE, a non-US company shall satisfy atleast one conditions: Company must have an
average adjusted pre-tax income of $100 million (Rs. 750 crore) or more in last three
financial years and also each of the two recent financial year shall have greater than $25
million (Rs. 190 crore) of pre-tax income also revenue must be $100 million (recent 12
month) and $75 million (Rs. 560 crore) for the recent financial year. Though, the company
must have atleast 5000 shareholders globally and minimum 25 lakh shares must be held by
public. Further the publicly held company must not have less than $60 million with a price of
atleast $4 per share. Whereas as per NASDAQ, the company must have 12.5 lakh shares
minimum with public. The company’s market value must not have less than $45 million with
a price of atleast $4 per share. Company must have an average adjusted pre-tax income of
$11 million (Rs. 80 crore) or more in last three financial years. Revenue must not be less than
$110 million (Rs. 825 crore) for the recent financial year.

The exchanges have strict corporate governance regulations and rules on independent
directors, audit committee, compensation to executive officers, code of conduct, nomination
of directors, AGMs. A good demand of Jio can be seen during the time of IPO. It is likely to
file IPO papers in 12 months.

CONCLUSION

Currently, Jio is the third largest mobile service provider in the world and the largest in India.
Having a base of 400 million and is further growing in an impressive rate. Prices of RIL
shares also increased gradually. It can be expected that the company will try in reducing other
liabilities as well as focus on making its balance sheet stronger. The road further of RIL is
bright with all the potential imbibed in the retail and telecom business. Big things are in plan
by Reliance, and expecting the company in maintaining its status as one of the leaders in the
Indian business.

In 1991, economic reforms were liberalised encouraging foreign investment in India which
gave an upturn in the foreign exchange and by this the changing of “regulation” to
“management” took place. The truth behind this is that certain provisions under Foreign
Exchange Regulations Act, 1974 were strict towards the foreign exchange as well as import
and export of currency, because of which a new act was formed because of the provisions
which does not restrict majorly foreign exchange and also about the import and export
currency gave rise to Foreign Exchange Management Act, 1999. The increase of foreign
exchange over a period of time is bringing major changes in the economy. The foreign
exchange reserves are currently up to $19 billion approx. Increase in foreign exchange can be
raised more if various sectors are made more flexible such as focusing on manufacturing
sector which will have a growth in both infrastructure and also labour laws. The sectoral cap
which is applied in various sectors over the years should be looked likely on insurance and
such other important sector which is necessary. and encouraging more investment from
automatic route even. By making the sectoral cap to 100% with automatic route in the
construction development i.e. infrastructure, townships, housing is one of the positive things
which is done. Encouraging more areas under automatic route and also reducing the delay in
various procedures as well as various necessary approvals should also be focused on. Increase
the foreign inflows is also required by some of the states in the country. Supporting and
encouraging the Start-ups is necessary for the development in different sectors in India.
Educational sector should also be kept in priority. Foreign exchange management act, 1999
and various regulations are amended as and when needed requirement. The Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019 thus gives a broad view with respect to the
sectoral caps which are given in various sectors adding the entry routes as well the steps
which needs to be followed by a FPI or any other investors whiling investing in India.

Replacing the old Act from i.e. Foreign Exchange Regulations Act, 1973 (FERA) to Foreign
Exchange Management Act, 1999 (FEMA) aided in removing the defects i.e. provisions
which was affecting the foreign market and encouraging investments in India as well as
outside India. FEMA is one of the reasons in boosting the Indian economy and its flexibility
being more with comparison to FERA brought various rules and regulations and the latest
rule i.e. the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 which gave
detailed rules with all the possible sectoral caps and its entry routes. Further the roles of
Foreign Portfolio Investor, Foreign Venture Capital Investor, Non-Resident Indian while
investing in India the steps to be followed also the transfer can be done by the manner which
are stated in these rules. Further, the case study of Reliance Jio is a good example to
understand the Initial Public Offer which can be done overseas market. Thus, the foreign
exchange market is growing in a rapid manner and by various investments in India in
different sectors brings more development in our country.