foreign exchange management amendment 2019

The amendment to the Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019 is a challenge

Foreign investments 

1 it will play a crucial role in aiding the government’s goal of a $5 trillion economy by the end of the financial year 2025-26. 

2 if we want to attract foreign investment, it is essential to remove all the bottlenecks for the Indian companies receiving this investment, 

and also foreign investors who are willing to bet on the India growth story.

The amendment to FEMA 

1 It create challenge for Indian companies, especially start-ups and smaller enterprises seeking foreign investments. 

2 necessitate prior government approval 

any investments in Indian companies, whether direct or indirect, originating from entities located in countries that share land borders with India (“Neighbouring Countries”), or where the “beneficial owner” of the said Indian investment is situated in, or is a citizen of any of these Neighbouring Countries would necessitate prior government approval (“PN3 Requirement”).

3 इसे कब लाया गया था ?

While the aim of the amendment which was promulgated during the COVID-19 pandemic was salutatory — i.e., to curb opportunistic takeovers or acquisitions of Indian companies by Neighbouring Countries during difficult times created by a black swan event —

(RBI) has begun taking a more conservative view 

 latter half of 2023, the Reserve Bank of India (RBI) has begun taking a more conservative view concerning issues on which the law was silent, especially under FEMA NDI.

For example, last year, numerous Foreign Owned or Controlled Companies (“FOCCs”) began receiving notices from the RBI regarding their downstream investments. 

The industry has since taken the view that FOCCs will be placed under the same restrictions as non-residents on the aspects on which the law is silent.

 obstacle of navigating the prior government approval route

1 it is exacerbated by its time-consuming nature and high rejection rate.

2 pending or rejected applications is not published by the Government of India, some government officials have stated that proposals worth ₹50,000 crore from the Neighbouring Countries are either pending, withdrawn or rejected; and a staggering 201 applications have been rejected in the past three years.

fines of up to three times the investment received 

1 With the PN3 Requirement, the onus of compliance is on the Indian company that receives foreign investment, with the regulatory authorities having the discretion to impose fines of up to three times the investment received.

2 Many of these start-ups receive investments far beyond their revenue or assets.

 3 So, such fines could leave them insolvent, even if they liquidate. Non-compliance would likely trigger legal battles, adding to India’s already significant backlog of court cases.

Issues and solutions

First, the safety challenge.

Indian companies could consider having foreign investors to furnish representations backed by indemnities regarding their compliance with the PN3 Requirement. However, this may discourage foreign investment due to potential liabilities.

भारतीय कंपनियाँ विदेशी निवेशकों से पीएन3 आवश्यकता के अनुपालन के बारे में क्षतिपूर्ति द्वारा समर्थित अभ्यावेदन प्रस्तुत करने पर विचार कर सकती हैं। हालाँकि, यह संभावित देनदारियों के कारण विदेशी निवेश को हतोत्साहित कर सकता है।

Second, defining ‘Beneficial Owners’.

The definition of ‘beneficial owner’ 

 potentially ranging from 10% (as provided under the Indian company law) to 25% (as recommended by the Financial Action Task Force). 

The selection of the specific threshold can be customised to align with the government’s objective of scrutinising varying levels of foreign investment across different sectors. 

For example, sectors such as telecom and defence, which are sensitive in nature, may warrant heightened scrutiny when compared to sectors such as manufacturing and construction, where India requires additional capital.

 rights regarding board meeting quorums or veto powers over operational matters 

such as incurring any capital expenditure or availing any loan may confer control and should be outlined. However, investor value protection rights, such as veto powers over mergers or right of first offer, should be excluded from the definition, as they do not constitute control.

Third, consultation mechanism

 FEMA NDI, akin to Indian competition law, could be amended to incorporate a time-bound consultation mechanism with regulatory authorities, to determine whether specific clauses are control-conferring.

Source the hindu