Jurisdiction - India
India – Foreign Exchange Update.

27 October, 2014

  • The Reserve Bank of India (‘RBI’) has, by its circular dated July 15, 2014 and corresponding amendments to FEMA (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘FEMA 20’), revised the pricing guidelines for unlisted companies in respect of transfer and issue of shares and for exit from investment in equity shares with or without optionality clauses.

For unlisted companies, RBI has now set out general principles for the determination of the price of equity shares. The cap and floor price for valuation of shares (with or without optionality clauses) are to be arrived at as per any internationally accepted pricing methodology on arm’s length basis and duly certified by a chartered accountant or a SEBI registered merchant banker, the guiding principle being that the non-resident investor is not guaranteed any assured exit price at the time of making the investment and must exit at the market price prevailing at the time of exit. The pricing for the issue and transfer of shares of listed companies continues to be
as per the SEBI guidelines, and in case of instruments with optionality clauses, exit will be as per the market price prevailing on the recognized stock exchanges, without any assured return.

  • By circular dated July 14, 2014 and corresponding amendments made to FEMA 20, RBI has included partly paid equity shares and warrants as eligible instruments for the purpose of foreign direct investment (‘FDI’) and FPI subject to certain prescribed conditions, including inter alia:


i. Partly Paid Equity Shares: (a) pricing is required to be determined upfront and 25% of the total consideration must be received upfront; and (b) the balance consideration must be received within a period of 12 months. The time period can be extended beyond 12 months by both listed and unlisted companies in case the issue size exceeds INR 5bn and a monitoring agency is appointed.

ii. Warrants: (a) Pricing of the warrants and the price/conversion formula is required to be determined upfront and 25% of the consideration amount must be received upfront; and (b) the balance consideration must be received within 18 months. The price at the time of conversion should not be lower than the fair value worked out at the time of issuance of the warrant, in accordance with existing FEMA regulations and pricing guidelines stipulated by RBI.

The foreign inward remittance received towards each upfront or balance payment is to be made in the prescribed advance reporting form along with relevant documents/information. Further, Form- FCTRS and Form FC-GPR will have to be filed to the extent the partly paid shares and warrants are paid up. Separately, other requirements under the Consolidated Foreign Direct Investment Policy (‘FDI Policy’), such as compliance with the stipulated sectoral caps (on the assumption that the partly paid shares/warrants are converted into fully paid shares), are required to be met with. NRIs are also now eligible to invest on non-repatriation basis in partlypaid shares and warrants issued by Indian companies subject to the relevant conditions under applicable laws.


  • The Ministry of Commerce and Industry, Department of Industrial Policy & Promotion (‘DIPP’), by way of Press Note 7 (2014 Series) dated August 26, 2014, has revised the policy on FDI in the defence sector, whereby the FDI cap in the defence sector has been increased from 26% to 49%, under the approval route. Any investment above 49% will be permitted by the Cabinet Committee on Security (‘CCS’) on a case to case basis. Other policy conditions have also been revised, including inter alia (i) the application for FDI is to be made only by an Indian company owned and controlled by Indian citizens; and (ii) lock-in period of three years with respect to the transfer of equity from one non-resident investor to another non-resident investor stands deleted.


  • DIPP, by way of Press Note 8 (2014 Series) dated August 27, 2014 has revised the FDI Policy, wherein 100% FDI is now permitted in railway infrastructure under the automatic route, subject to the condition that any FDI proposal above 49% of an investee company in sensitive areas is to be brought by the Ministry of Railways before the CCS for consideration on a case to case basis. Further, the scope of ‘Infrastructure’ and ‘Common Facilities’ under the sector/activity of Industrial Parks under the FDI Policy has been amended to include railway lines and connectivities.


  • Pursuant to FEMA 20, an Indian company was permitted to issue shares / convertible debentures under the automatic route to a person resident outside India against lump-sum technical know-how fee, royalty, external commercial borrowings and import payables of capital goods by units in Special Economic Zones, subject to certain conditions. RBI, by way of its circular dated September 17, 2014, has now permitted (subject to prescribed conditions), an Indian company to issue equity shares against any other dues (in addition to the above) payable by the investee company, remittance of which does not require prior permission of the Government of India or RBI under the Foreign Exchange Management Act, 1999 or any of its rules, regulations or directions.


  • RBI has, by way of a circular dated July 3, 2014, restored the limit of Overseas Direct Investment (‘ODI’)/financial commitment to be undertaken by an Indian party under the automatic route to the limit prevailing prior to August 14, 2013. The limit has accordingly been reinstated to 400% (from 100%) of the net worth of the company as per the last audited balance sheet. However, any financial commitment exceeding USD 1 billion or its equivalent in a financial year will require prior approval of RBI even when the financial commitment is within the eligible limit of 400% under the automatic route.


  • Under the FEMA (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000, prior approval of RBI was required for transferring assets of a Liaison Office (‘LO’)/ Branch Office (‘BO’)/ Project Office (‘PO’) to their subsidiaries or other LO/BO/PO or to any other entity. Pursuant to a notification dated June 12, 2014, with a view to streamline the process of closure of LO/BO/PO, Authorized Dealer banks have now been delegated this power, subject to certain prescribed conditions.


  • Pursuant to its circular dated June 3, 2014, RBI had increased the Liberalised Remittance Scheme (‘LRS’) limit from USD 75k to USD 125k per financial year for resident individuals to remit funds outside India for any permitted current or capital account transaction, or both. By way of its circulars dated July 17, 2014 and August 22, 2014, RBI has clarified that the funds under the LRS can now be used for acquisition of immovable property outside India. Further, the postfacto reporting requirements for acquisition of such immoveable property has been done away with.




For further information, please contact:


Zia Mody, AZB & Partners

[email protected]


Abhijit Joshi, AZB & Partners 

[email protected]


Shuva Mandal, AZB & Partners 

[email protected]


Samir Gandhi, AZB & Partners

[email protected]


Percy Billimoria, AZB & Partners 

[email protected]


Aditya Bhat, AZB & Partners 

[email protected]


AZB & Partners Capital Markets Practice Profile in India



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