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

Dr. Shakuntala Misra National Rehabilitation University

Lucknow

Faculty of Law

SUPPLEMENTARY READING MATERIAL FOR STUDENTS

B. Com., LL.B. (Hons.)

8th Semester

Course Name: Law of Investments & Securities

Course Code: LLB 802

TOPIC 01 / UNIT 02

Important Definitions in I & S Laws

Prepared by:

Shail Shakya

B.A., LL.B. (Hons.), LL.M., UGC-NET (Law)

Assistant Professor of Law
E-mail: sshakya@dsmnru.ac.in

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

The most basic framework for foreign investments in India (both direct & indirect) is provided
by FEM (Transfer or Issue of Securities by a Person Resident outside India)
Regulations, 2017 (hereinafter called as TISPROI Regulations, 2017) as amended from time to
time.1 The power to notify amendments to this regulation is vested with Reserve Bank of India
which is also the custodian and controller of foreign exchange in India.2 Definitions of various
key terms have been provided under the regulation subject to otherwise requirements for general
interpretation of meanings.3 To begin with, the first key term that has been defined in the
regulations is „Investment‟ as „Investment means to subscribe, acquire, hold or transfer any
security or unit issued by a person resident in India‟.4 It has also been provided that the
definition shall also include any action to acquire, hold or transfer depository receipts issued
outside India, the underlying of which, is a security issued by a person resident in India.5 It is
therefore clear from the definition provided under the regulations that investment is a
mechanism of doing subscription, acquisition, holding or transferring any security or unit of any
security which includes stocks.

It should be noted here that the TISPROI Regulations, 2017 have been formulated in
connection with Foreign Exchange Management Act, 1999 (42 of 1999) which has been
identified and named as „Act‟ under the regulations.6 In order to maintain necessary connection
and coordination with the parent Act, the regulations prescribe that „words and expressions used
but not defined in these Regulations shall have the same meanings respectively assigned to them
in the Act‟.7 As a savings clause therefore, all prescriptions under Section 2 of FEMA, 1999
become applicable to transactions covered under TISPROI Regulations, 2017. However, all
definitions under FEMA, 1999 are not strictly applicable to TISPROI Regulations, 2017 for
example, „transfer‟ under FEMA has been narrowed down sufficiently to satisfy the purpose of
regulating investments.8

The regulations also contain definition of „investments on repatriation basis‟ which

has been defined as “an investment, the sale/ maturity proceeds of which are net of taxes eligible
to be repatriated out of India, and the expression „investment on non-repatriation basis‟, shall be
construed accordingly”.9 It is a fact worth of consideration that the Reserve Bank is empowered
to place caps on repatriation of profits earned out of investments made in India. The literary
meaning of repatriation is transfer of sale proceeds/ profits out of investments which is
classified as „income accrued in India‟ or „deemed to have been accrued in India‟ under the
meanings and interpretation of Income Tax Act, 1961.

1 This textbook is based on Notification No. FEMA 20 (R)/2017-RB dated 7 November, 2017 on FEM (Transfer
or Issue of Securities by a Person resident outside India) Regulations, 2017 (amended up to 24 September, 2018)
notified by Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai
2 In exercise of powers conferred by clause (b) of sub-section (3) of Section 6 and Section 47 of Foreign Exchange

Management Act, 1999 (42 of 1999)

3 Regulation 2 of TISPROI Regulations, 2017
4 Regulation 2 (xxvii) of TISPROI Regulations, 2017
5 Explanation (a) & (b) to Regulation 2 (xxvii) of TISPROI Regulations, 2017
6 Regulation 2 (i) of TISPROI Regulations, 2017
7 Regulation 2 (xlvii) of TISPROI Regulations, 2017
8 Section 2 of FEMA, 1999 & Regulation 10 of TISPROI Regulations, 2017
9 Regulation 2 (xxviii) of TISPROI Regulations, 2017

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

TISPROI Regulations have clearly defined „Foreign Investment‟ beyond the scope of
errors of interpretation and anomalies as „any investment made a person resident outside India
on a repatriable basis in capital instruments of an Indian company or to capital of an LLP‟.10 It is
also made clear that where a declaration has been made by persons as per the provisions of
Companies Act, 2013 about a beneficial interest being held by a person resident outside India,
then even though the investment may be made by a resident Indian citizen, the same shall be
counted as foreign investment.11 The concept of beneficial interest is a characteristic feature of
Indian jurisprudence for the reason that immediate rights or actionable claims are not vested
with the persons holding beneficial interests. It has also been prescribed that a person resident
outside India may hold foreign investment either as foreign direct investment or foreign
portfolio investment12 in any particular Indian company.13 The important point of consideration
is that foreign investment is investment made in capital instruments which have been defined
under the regulations separately.

On the other hand, „Foreign Direct Investment‟ has been defined as „Investments
through capital instruments by a person resident outside India in an unlisted Indian company; or
in 10% or more of the post paid-up equity capital on a fully diluted basis, of a listed Indian
company‟.14 Fully diluted basis here means the total number of shares that would remain
outstanding if all possible sources of conversion are exercised.15 The term „fully diluted basis‟
means when a corporation grants someone the right to buy shares later, such as granting a stock
option to an employee, those shares are not yet issued and outstanding. The shares do not
appear on the corporation‟s stock ledger, and a person does not become a stockholder by
holding them. If the option is exercised, however, the shares would then become issued and
outstanding and the person would become a stockholder.

In the light of discussion made above, it becomes pertinent to understand the

fundamental difference between foreign investment and foreign direct investment which are
seldom deemed synonymous and interchangeable. It is clear from the definitions provided in
TISPROI Regulations, 2017 that foreign investment is a strategy to ensure participation in the
affairs of an Indian entity by investing ‘in’ capital instruments. However, foreign direct
investment is not just participation in the affairs of an Indian entity but is done to ensure
presence in the domestic market where the entry is ensured by investments ‘through’ capital
instruments. The difference between „in‟ and „through‟ here has the cumulative effect of
changing the entire scenario where one reflects a mere contribution whereas the other has effect
of establishing presence in a planned manner. It is therefore recommended that a person should
take care while using the terms synonymously and interchangeably. It has been further provided
that in case an investment by a person resident outside India in capital instruments of a listed
company falls below 10% of the post issue paid up capital on a fully diluted basis, the investment
shall still be considered as foreign direct investment.16

10 Regulation 2(xviii) of TISPROI Regulations, 2017

11 Explanation to Regulation 2 (xviii) of TISPROI Regulations, 2017
12 See Regulation 2 (xix) of TISPROI Regulations, 2017
13 Note to Explanation of Regulation 2 (xviii) of TISPROI Regulations, 2017
14 Regulation 2(xvii) of TISPROI Regulations, 2017
15 Explanation to Regulation 2(xvii) of TISPROI Regulations, 2017
16 Note to Regulation 2(xvii) of TISPROI Regulations, 2017

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

The next in line of important definitions is „Sectoral Cap‟ which means „the maximum
investment including both foreign investment on a repatriation basis by persons resident outside
India in capital instruments of a company or the capital of an LLP, as the case may be, and
indirect foreign investment, unless provided otherwise. This shall be the composite limit for the
Indian investee entity‟.17 It is clear from the definition that it is a prescription of ceiling limit for
investment18, whether direct or indirect for an Indian company beyond which, reception would
be prohibited and therefore illegal in law. However, it is important to note the use of phrase,
„unless otherwise provided‟ which refers to the exclusive power of Reserve Bank of India under
the regulations to allow for investments in such cases and on such conditions as it may deem
fit.19 Sectoral cap is therefore maximum amount which can be invested by foreign investors in an
entity, is composite and includes all forms of investments20 except FCCBs and DRs having
underlying instruments which can be issued being in the nature of debt, therefore not to be
treated as foreign investment.21 There may be situations and conditions which may accidentally
cause breach of sectoral cap the company so concerned, has been mandated to take appropriate
approvals from the government of India.22

TISPROI Regulations has made it clear in letter and spirit that the onus of compliance
with the sectoral/ statutory caps on foreign investments and other attendant conditions, if any,
shall be on the company receiving foreign investment.23 The revised system of monitoring limits
to foreign investments has been put in place by Securities & Exchange Board of India (SEBI) in
consultation with Reserve Bank of India (RBI), framed under FEMA, 1999 whereby
infrastructure and IT system has been put in place for operationalising monitoring mechanism of
depositories and stock exchanges for disseminating information on the available investment
headroom.24 As a general rule, it has been prescribed that in sectors/ activities not listed or not
prohibited in TISPROI Regulations, 2017, foreign investment shall be permitted up to 100% on
the automatic route, subject to applicable laws/ regulations, security and other conditionalities.25

In cases where the maximum permissible limit for foreign investment is breached by the
investors concerned, the depositories are under an obligation to inform the exchanges regarding
the breach, exchanges shall issue circulars/ public notifications on their website and shall halt all
further category wise purchases in foreign investment and the relevant foreign investors shall
cause divesting of their excessive holdings within 5 trading days from the date of settlement of
the trades by selling shares to only domestic investors. 26 It is however important to note that,
neither FEMA nor TISPROI Regulations, 2017 prescribe for any sanction/ action to procure the
foreign investments within prescribed limits.

17 Regulation 2(xxxix) of TISPROI Regulations, 2017

18 Sector wise sectoral caps are provided in Regulation 16 of TISPROI Regulations, 2017
19 Regulation 3 of TISPROI Regulations, 2017
20 Schedule 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 9 (LLPS), 10 (DRs) and 11 (Investment Vehicle) of

TISPROI Regulations, 2017

21 Schedule 5 of TISPROI Regulations, 2017
22 Proviso to Regulation 9(1)(a) of TISPROI Regulations, 2017
23 Regulation 16 B(7) of TISPROI Regulations, 2017
24 SEBI Circular No IMD/FPIC/CIR/P/2019/61dated 05 April, 2018 available at
https://www.sebi.gov.in/legal/circulars/apr-2018/monitoring-of-foreign-investment-limits-in-listed-indian-
companies_38575.html (18 FEB, 2019)
25 Regulation 16 B(3) of TISPROI Regulations, 2017
26 Supra n. 24

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

TISPROI Regulations, 2017 prescribe for various kinds of instruments that could be
used for the purposes of foreign investment and foreign direct investment in India. Capital
Instruments have been defined as „equity shares, debentures, preference shares and share
warrants issued by an Indian company‟.27 The phrase „issued by an Indian company‟ here means
issued in pursuance of procedure prescribed under the relevant provisions of Companies Act,
2013.28 However, it should be noted that „share warrants‟ are not issued under the Companies
Act, 2013 but their issue is regulated (in terms of pricing and issue) by TISPRO Regulations and
SEBI Regulations.29 Share warrants are securities under the category of „other marketable
securities of like nature‟30 under SCR Act, 1956.31 It has also been clarified that equity shares
issued in accordance with Companies Act, 2013 shall include shares that have partly paid but the
same is required to be fully called-up within 12 months32 of such issue and 25% of the total
consideration shall be received upfront.33 There have been several debates regarding the issue of
share warrants and partly paid up shares by Indian companies over a long period of time.34

Debt borrowings for the purposes of foreign investments are classified as „External
Commercial Borrowings, Trade Credits, Foreign Currency Convertible Bonds (FCCBs) and
Foreign Currency Exchangeable Bonds (FCEB)‟.35 There is also an addition of „convertible note‟
which is issued by a startup company and is considered initially as debt which is repayable at the
option of the holder or which is convertible into such number of equity shares within a period of
5 years from the date of issue, upon occurrence of specified events as per the terms and
conditions.36 The concept of startup has also been clarified in the regulations as a private
company that complies with the conditions and requirements of a startup under the
government‟s directive.37

The other method of putting finance is issue of „Depository Receipts‟ which has been
defined as „A foreign currency denominated instrument, whether listed on an international
exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of
eligible securities issued or transferred to that foreign depository and deposited with a domestic
custodian and includes „global depository receipt‟ as defined in Companies Act, 2013.‟38

27 Regulation 2(v) of TISPROI Regulations, 2017

28 See Section 23 of Companies Act, 2013
29 Refer SEBI, Discussion Paper on Issuance of Partly Paid Shares & Share Warrants‟, 2014 available at

https://www.sebi.gov.in/sebi_data/attachdocs/1417511914375.pdf (18 FEB, 2019)

30 Section 2(h) of Securities Contract Regulation Act, 1956
31 Refer RBI Notification No. FEMA308/2014-RB dated 30 June, 2014 and RBI/2014-15/123 A.P.(DIR Series)

Circular No.3 dated 14 July, 2014

32 Explanation (b) to Regulation 2(v) of TISPROI Regulations, 2017
33 Explanation (a) to Regulation 2(v) of TISPROI Regulations, 2017 and RBI/2014-15/123 A.P.(DIR Series)

Circular No.3 dated 14 July, 2014

34 See SEBI‟s movement at https://economictimes.indiatimes.com/sebi-moots-new-norms-for-warrants-partly-

paid-shares-issuance/articleshow/45350257.cms (18 FEB, 2019)

35 Reserve Bank of India, RBI/FED/2015-16/15 FED Master Direction No.5/2015-16 dated 1 January, 2016

amended up to 22 November, 2018

36 Regulation 2(vi) of TISPROI Regulations, 2017
37 See Regulation 2(xlii) of TISPROI Regulations- Incorporate under Companies Act, 2013 and recognized as such

in accordance with notification No GSR 180(E) dated 17 FEB, 2016

38 Regulation 2(ix) of TISPROI Regulations, 2017

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

Another important definition in relation to investments by Persons resident outside India is „FDI
Linked Performance Conditions‟ which means „the sector specific conditions stipulated in
Regulation 16 of TISPROI Regulations, 2017‟.39 One such popular FDI linked performance
condition is „Minimum Capitalization Norms‟ as is included in the case of FDI in entities linked
to financial services.40 It has been clearly stated that foreign investments in „Other Financial
Services (OFS)‟ shall be subject to conditionalities, including minimum capitalization norms, as
specified by the concerned Regulator/ Government agency.41 It has also been clarified that an
entity which is not registered with a financial sector regulator, or which is otherwise exempted
under the relevant sector regulations, may be deemed to be an unregulated OFS.42 This is
expected to be a hurdle for Indian companies in attempting for financial technology, which
requires foreign investment. India has been perceived as an active user of various performance
requirements and beyond local content regulations that were applied to the automotive industry,
the government has also imposed export obligations on the larger and foreign controlled
enterprises in industries reserved for small scale sectors; enterprises operating in export
processing zones and enterprises under an export-oriented units scheme have also to meet
certain obligations.43

The terminology of prescriptions includes both express as well as implied conditions incumbent
on investors in the relevant market for example, in relation to investments in pension funds, it is
said that an Indian pension fund shall ensure that its ownership and control remains at all times
with resident Indian entities as determined by Government of India/ PFRDA as per the rules/
regulation issued by them, which inter alia is an express obligation.44 On the other hand, putting
regulatory discretions to Government of India/ Sector-specific Regulatory creates an underlying
obligation of being bound by various directives/ circulars that may be issued by them from time
to time in relation to performance of their regulatory functions.45

There are other hidden conditionalities/ FDI-linked conditions that may not have been expressly
covered in TISPROI Regulations, 2017 which for example includes requirements of technology
transfer, which although has been discontinued in abstract form but has remained an important
propelling factor allowing higher foreign equity than permitted in sectoral caps by FIPB on a
case to case basis.46 Similarly, R&D requirements could also be imposed to ensure an adequate
investment in R&D for absorption and adaptation of imported technology in R&D activities of
recognized centers by Ministry of Science & Technology.47 It could however be said with
confidence that government has adopted prescription of performance conditions in order to
ensure that the FDI flow is in line with its development objections and protection of economic
sovereignty of India. There is always scope for suitable modifications.

39 Regulation 2(xii) of TISPROI Regulations, 2017

40 See Regulation 16 of TISPROI Regulations, 2017
41 See Table Entry F.10.1 of Regulation 16 of TISPROI Regulations, 2017
42 RBI Master Directions – Foreign Investment in India, dated January 12, 2018, accessible at

https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11200 (19 FEB, 2018)

43 Refer UNCTAD, UNCTAD/ITE/IIA/2003/7 available at https://unctad.org/en/Docs/iteiia20037_en.pdf, at

p. 16 (19 FEB, 2019)

44 See Table Entry F.9.1 of Regulation 16 of TISPROI Regulations, 2017
45 See for example, Table Entry F.6, F.7, F.8, F.9 and F.10 of TISPROI Regulations, 2017
46 Supra, n. 43 at p. 104
47 Supra, n. 43 at p. 105

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