“Foreign Exchange Management (Transfer or Issue of Security by a Person Resident

outside India) (Amendment) Regulations, 2018” – STEP TOWARDS EASE OF DOING BUSINESS

Central Government has been taking numerous steps to enhance the Foreign Direct Investment in
India. Passing of Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) (Amendment) Regulations, 2018 (hereinafter referred as Regulation,
2018) is one such step. The amendment has been brought by the Reserve Bank of India (“RBI”)
under clause (b) of sub-section (3) of Section 6 and Section 47 of the Foreign Exchange
Management Act, 1999 to the Foreign Exchange Management (Transfer or issue of Security by a
Person Resident outside India) Regulations, 2017 (hereinafter referred to as 'the Principal
Regulation)1 to liberalize the important sectors of the Indian Economy.

The RBI on March 26, 2018 notified the Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident outside India) (Amendment) Regulations, 2018 vide notification
No. FEMA.20(R)(1)/2018-RB. The author would critically analyze the amendments brought
under the regulations, 2018 and their effect on enhancement of foreign investment in India. The
significant changes brought by the amendment regulation 2018 with respect to Sector-Specific
Policy for Total Foreign Investment are as follows:

1. The first amendment that has been brought up by the regulation 2018, deletes the word
“Indian Company” from sub-regulation 5 of regulation 16.B of the Principal Regulation, and
states that foreign investment in investing companies which are Non – Banking Financial
Company not registered with the reserve Bank2 engaged in the capital investment in other
Indian entities will require prior approval of the government addition to the Reserve Bank of
India Act, 1934 and regulations framed there under while Non- Banking financial Company
which are registered with Reserve Bank will be under 100% automatic rule unlike in the
regulation 2017.

 Provisions with respect to the core Investment companies still remain intact.

1
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations,
2017
2
Clause 1, Amendment to Regulation 16.B, notification No. FEMA.20(R)(1)/2018-RB.
 The regulation has been amended to enhance the foreign Direct Investment by relaxing the
procedure. On one hand Investing Companies feel secured because the NBFCs are registered
with the RBI and on the other hand it reduces the time taken in receiving approval by the
government. The amendment is definitely a good step to enhance foreign investment in India.

2. Joint Audit of the Indian Investee Company

The regulations 2018 have inserted sub-regulation 8 to regulation 16.B of the Principal
Regulation, which states that the auditioning of an investee company in India needs to be carried
out as joint audit. The auditioning needs to be carried out by the auditor/auditing firm specified
by the person who has invested in the investee company of India and by an independent auditor
which is not associated with the auditor/auditor firm specified by the person. Generally, the
independent auditor will be appointed by the investee company, but the investor should agree to
the auditor appointed.

 The amendment ensures that the auditioning is just not carried by the auditors specified by
the foreign investors but also by an auditor which is not a part of the international network
making it a joint audit of the Indian investee Company. The amendment ensures
transparency and equal opportunity to the Indian auditioning firm.

3. Foreign Investment – Civil Aviation Sector

The regulations 2018 have amended existing SL. No 9.3(a) of regulation 16.B of the Foreign
Investment.

Air Transport Services Principal Act Amended Regulation

(a) (i) Scheduled Air  Investment up to 49%  Automatic up to 49%
Transport Service/ Domestic
Scheduled Passenger Airline through Automatic  Government route
beyond 49%
Route.
(ii) Regional Air Transport  Automatic up to 100%
Service  100% FDI for NRI and
for NRIs and OCIs
OCBs
 The Principal Act allowed Foreign Investment in Air Transport Services up to 49% through
automatic route. Anything beyond 49% was restricted under the regulation. The amendment
Regulation 2018 allowed Foreign Investment up to 49% through automatic route and beyond
49% through government route. The amendment aims to enhance foreign Investment to ease
the process of doing business in India and also, ensures the involvement of the government to
keep a check.

4. Foreign Investment in M/s Air India Ltd.

The Regulations, 2018 deletes Note 3 from SL.No 9.5, which stated that the policy mentioned at
9.5(c) above is not applicable to M/s Air India Limited.3 The regulation 2018 permits the foreign
investment in M/s Air India and inserted clause (d) in SL.No 9.5, after clause (c). The regulation
lays down certain conditions with respect to investment in M/s Air India which are as follows-

 Foreign investment in M/s Air India Ltd., including that of foreign airline(s), shall not exceed
49% either directly or indirectly.
 Substantial ownership and effective control of M/s Air India Ltd. shall continue to be vested
in Indian Nationals.4

 The amendment is an step to privatize M/s Air India and enabled it to recover from the debts.
Since the Note 3 from SL.No. 9.5 has been removed, the added clause (d) is subject to the
conditions laid down in clause (c). The use of the word “Directly and Indirectly” ensures that
the foreign investment do not exceed the limit of 49% either by investing directly in M/s Air
India or indirectly investing in an entity which invests in M/s Air India. Foreign investors and
foreign Airlines are permitted to invest in Air India but the amendment ensures that the
effective control still remains with Indian Nationals to avoid any kind of future conflict of
interest and its smooth functioning.

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Note 3, SL No. 9.5 clause 16.B
4
Amendment Regulation 2018, clause Iv.
5. Construction Development: Townships, Housing, Built-up infrastructure

In SL. No 10.2, states “other conditions” with respect to foreign investment in Construction
Development: Townships, Housing, Built-up infrastructure. The Regulation, 2018 inserts Note 7
in S. No. 10.2. Foreign investment is not permitted in an entity which is engaged or proposes to
engage in real estate business, construction of farm houses and trading in transferable
development rights.5 Real Estate Business has been defined under the Principal Regulation as

“dealing in land and immovable property with a view to earning profit there from and does not
include development of townships, construction of residential/ commercial premises, roads or
bridges, educational institutions, recreational facilities, city and regional level infrastructure,
townships”6

 In India Foreign Investment is not permitted in an entity investing in the Real Estate Sector
(land) since the government intends to avoid all such risks which can result in the control of
Land of Indian Territory by an outsider. It also avoids the risk of prize escalation of land
which can be one of the consequences of FDI in an entity investing in Real Estate Sector
(Land). The regulation 2018 excludes Real Estate Broking services from the “Real Estate
Sector” and permits Foreign Direct Investment up to 100% in the Real Estate Broking Sector
through the Automatic route. The relaxation granted to the Real Estate Broking Sector is to
boost the Real Estate sector. It also ensures the registration of property brokers in India under
RERA and the risk of controlling of Indian Territory by the outsiders remains out of the
picture.

6. Single Brand Product Retail Trading (E- Commerce)

As per the SL. No 15.3 of the Principal Regulation 16.B, allows FDI up to 49% through
automatic route and beyond 49% and up to 100% is permitted through government route. The
Regulation 2018, amends the provision by substituting “Automatic up to 49%; Government route
beyond 49%” with “Automatic”.

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Note 1 , Regulation 10.2
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Note 6, SL. No. 10.2
 The amendment is to enhance the investment in Single Brand Product Retail Trading.
Removal of government route will also increase the competition for Indian entity and will
attract the investment in production and marketing.

SL.No. 15.3.1 of 16.B of the Principal Regulation states other conditions with respect to Single
Brand Product Retail Trading. Clause (d) of the SL. No. 15.3.1 has been amended and now, it
excludes the requirement to license agreement between the investor company and the brand
owner.

“A person resident outside India, whether owner of the brand or otherwise, shall be permitted
to undertake ‘single brand’ product retail trading in the country for the specific brand, either
directly by the brand owner or through a legally tenable agreement executed between the
Indian entity undertaking single brand retail trading and the brand owner.”

 The amendment of relaxing the procedure is with an intention to promote Foreign Direct
Investment in the country.

 In SL. No. 15.3.1 clause (g) and clause (h) which dealt with the requirement of application
seeking permission of the government for foreign investment exceeding 49% and the
requirement to process the said application by the Department of Industrial Policy has been
deleted and Promotion and a new clause (i) has been inserted. The new clause states that for
the initial five years, incremental sourcing by overseas companies, including their group
companies for the specific brand will count towards the mandatory 30% local sourcing
commitment. The Regulation 2018 also deletes Note 2 and Note 3 from SL.No. 15.3.1 And
added Note 5. The deleted Note 2 stated that the Indian manufacturer is permitted to sell its
own branded products and Note 3 which mandated that Indian manufacturer would be the
investee company, which is the owner of the Indian brand and which manufactures in India,
in terms of value, at least 70 percent of its products in house, and sources, at most 30 percent
from Indian manufacturers.
 The Regulation 2018 through the addition of Note 5 requires a committee to relax the
procedure where the local sourcing is not possible. The committee is formed under the
 Chairmanship of Secretary, DIPP, with representatives from NITI Aayog concerned
Administrative Ministry and independent technical expert(s).

 The Regulation 2018 has relaxed the requirement of mandatory 30% local sourcing which
will enhance the foreign investment and will bring wide options for the customers in India. It
is definitely a great step by the Indian government to boost the Retail Industry. The
amendment ensures that foreign brands could easily incorporate wholly owned subsidiaries
in India to undertake SBRT, without tying up with any local Indian partner.

7. Replacement of the word ‘handicap’ with ‘disability’

 The Regulation 2018 replaces the word ‘handicap’ with ‘disability’ in SL. No. 16.3 in Note
2, in clause (a), in sub-clause (ab) in the Principal Regulation.
 Disability represents a form of diversity, similar to one’s gender, race, ethnicity, social class,
religion and so on.7 Disability is politically correct and respectable word to be used by the
Indian Legislature.

 SL.No. 16.3 deletes the Note 3 which stated that the definition of “medical device” is subject
to the Drugs and Cosmetic Act.
 The amendment has been brought to broaden the ambit of the word “Medical Device”. The
items include any instrument, apparatus, appliance, implant, material or other articles,
whether used alone or in combination, plus any software tool, intended by its manufacturer to
be used specially for human beings or animals for diagnosis, prevention, monitoring,
treatment or alleviation of any disease or disorder. The amendment has widened the
definition of medical devices which lead to the increase in investment pharmaceutical
department.

 The Regulation 2018 deleted clause (a) of F.6.1, which stated that Foreign Portfolio Investor
can only invest through Secondary Market Route which implies that FPI can also invest
through Primary Market.

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https://apa.org/pi/about/newsletter/2015/11/handicap-disabilities.aspx
 Previously, primary market which include IPO, QIP, rights issue, preferential offers and
stock buybacks by companies were restricted before the amendment, which has now been
eased to include both primary and secondary market. Initially to avoid any circumstance of
direct control by the foreign investors, this provision was introduced but now, to ease
mobilization of funds and welcome better technology, restriction from primary market has
been relaxed.

Purchase/ Sale of capital instruments of an Indian company by a person resident outside India

 The Regulation 2018 deleted Para 1(6) from schedule of the Principal Regulation and has
amended Para 1(4) which allows an Indian entity to issue a capital instrument as a
consideration through automatic route and through government route. The entity is supposed
to comply with the conditions prescribed by the government and /or RBI. In case of
government route, its mandatory for the entity to receive permission of the government. The
amendment allows an Indian entity to issue capital instruments against:

a. Swap of capital instruments; or

b. Import of capital goods/ machinery/ equipment (excluding second-hand machinery); or
c. Pre-operative/ pre-incorporation expenses (including payments of rent etc.).

 The amendment will definitely benefit the sectors which are dependent on obtaining
goods/machinery/equipment from foreign suppliers. The amendment also states that an
Indian entity can issue capital instrument against goods/machinery/equipment or Pre-
operative /Pre- Incorporation expenses through automatic route unlike in principal regulation.
The import second hand – machinery has been excluded in order to promote terms of being
green, clean and energy efficient.

The amendment Regulation 2018 aims towards enhancement of foreign investment by relaxing
the strict procedures to be followed. All the amendments mentioned above has been included in
the principal Regulation brought up by the RBI on 6th of April 2018 by the notification number
Notification No. FEMA 20(R)/2017-RB.