FEMA FOCUS

(A) Standard Operating Procedure for processing FDI Proposals notified by Department of Industrial Policy and Promotion dated 9^th November, 2020.

(I)  Application

The government has notified the Standard Operating Procedure (SOP) to be followed for obtaining approvals for foreign investment in sectors / activities requiring government approval. All applications for approval would need to be filed online through the Foreign Investment Facilitation Portal (FIFP) on www.fifp.gov.in in the specified format and containing documents mentioned in Annexure 1 to the SOP.

Further, once an application is received, the Department of Promotion of Industrial and Internal Trade (DPIIT) will identify the Administrative Ministry / Department (Competent Authority) concerned which will process the case. Detailed guidelines have been provided in respect of timelines to be followed for processing the applications with an outer limit of ten weeks or 12 weeks (for companies requiring security clearance from the Ministry of Home Affairs) from the date of filing of the application. Once the application is approved, an Approval letter as per Annexure 2 to the SOP will be issued to the applicant.

(II) Name of Competent Authority for approving the application

As per the SOP, the Competent Authority (CA) for approving / rejecting foreign investment for different sectors has been specified below:

Further, it has been clarified that the administrative Ministry / Department concerned as identified above by the DPIIT would continue to be the Competent Authority for post facto approval for foreign investment.

(III) Detailed flowchart for processing the application

The detailed process laid down in the SOP for processing the application is explained by way of the flow chart as under:

•  Following proposals will require security clearance from the MHA:

1. i) Investments in Broadcasting, Telecommunication, Satellites – establishment and operation, Private Security Agencies, Defence, Civil Aviation and Mining & Mineral, separation of titanium-bearing minerals and ores, its value addition and integrated activities;

1. ii) Applications arising out of Press Note 3 of 2020 dated 17^thApril, 2020 read with Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2020 dated 22^ndApril, 2020 as under:

1. a) investments from an entity of a country which shares land border with India or where the beneficial owner of an investment in India is situated in or is a citizen of any such country. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors / activities other than defence, space, atomic energy and sectors / activities prohibited for foreign investment; and / or
2. b) transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction / purview of paragraph 3.1.1(a) of the FDI Policy.

** In case application is not digitally signed, then applicant to submit physical copy to CA within seven days of receipt of email from DPIIT. If not submitted, then additional timeline of seven days can be given, failing which application will be treated as closed.

^ If no clarifications are received from the applicant, additional time of seven days should be given. Thereafter, if no additional details are provided, final reminder for submitting application in seven days to be given to the applicant, failing which application should be treated as closed.

(IV) Specific clarifications

Further, the SOP has also clarified the following points:

(a) Where FDI applications are incomplete – CA is not required to obtain concurrence from DPIIT for closure of the application. However, where applicant has submitted all details and CA proposes to reject the application, concurrence from DPIIT is required. The CA for closure of FDI application due to incomplete information / document would be the Secretary of the respective Ministry / Department;

(b) Where the FDI application seeks an amendment to an earlier approval granted by Government / FIPB and concurrence of DPIIT is sought for rejecting such an amendment and ask to file a fresh application – The applicant should not be asked to file a fresh application;

(c) NCLT has not yet approved the scheme of merger / demerger and concurrence of DPIIT is sought for rejecting the application – Approval of NCLT / competent authority as applicable under the Companies Act, 2013 is required before grant of FDI approval. Hence, where such approval is not received, the applicant should be advised to resubmit it upon receipt of requisite approval; and

(d) CA seeks DPIIT’s concurrence for conditions requiring compounding under FEMA / compliance of other laws / orders of courts – No concurrence from DPIIT required in such cases.

(V) Approving authority in DPIIT – The Secretary, DPIIT, is the competent authority for a decision on cases referred by other Ministry / CA seeking concurrence of the DPIIT.

(VI) Database – DPIIT and each CA to maintain a database on proposals received with details like name of investor, investee, date of receipt, company details, amount of foreign investment, date of grant of approval / rejection letter.

(VII) Surrender of approval – CA may accept withdrawal of approval letter from the applicant after receiving declaration clearly explaining reasons for withdrawal / surrender.

(VIII) Compounding of contraventions – Any contravention of FEMA would be subject to compounding as per Foreign Exchange (Compounding Proceedings) Rules, 2000 as amended from time to time.

Thus, the laying down of the detailed SOP in relation to obtaining approval under the Government route along with timelines for respective Ministries / Departments would definitely help in streamlining the process of approvals.

(B) Amendments to FDI Regulations governed by Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 by issuance of Notification dated 8^th December, 2020.

The Government had amended the above regulations in April, 2020 by placing restrictions on investments from countries with which India shares land border and taking such investments under the prior approval route. The Amendment has now clarified that investment made by a multilateral bank or fund of which India is a member shall not be treated as an entity of particular country and, hence, the beneficial ownership condition is not required to be examined in relation to investments from such multilateral bank or fund.

Further, FDI limit in the defence sector has been increased to 74% under the automatic route from the existing limit of 49%. Any FDI above 74% will be under the Government route. Additionally, certain additional conditions have also been specified for FDI in the defence sector both for existing as well as new companies.

(C) Amendments to Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 by issuance of Notification dated 15^th June, 2020.

(I) Schedule II – Investment by Foreign Portfolio Investors (FPI) & Schedule VIII – Investment by person resident outside India in an Investment Vehicle

Schedule II of FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 provided for the mode of payment and remittance of sale proceeds in case of investments by FPIs. There was a specific prohibition in Schedule II under which balances held in Special Non-Resident Rupee (SNRR) Accounts could not be utilised for investment in units of Investment Vehicles other than units of domestic mutual funds. The said prohibition has now been deleted by issuance of Notification dated 15^th June, 2020.

Accordingly, with effect from 15^th June, 2020, investment in REITS, InVits apart from domestic mutual funds can be made by FPIs from balances held in SNRR Accounts.

Similarly, amendments have been made in Schedule VIII which provides for the mode of payment in case of investment by a non-resident in an Indian Investment Vehicle. The Amendment now permits FPIs and FVCIs to invest out of their balance held in their SNRR Accounts for trading in units of an Indian Investment Vehicle listed or to be listed (primary issuance) on Indian stock exchanges.

(D) Amendment in Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 – FEMA 6(R) / 2015.

The above Regulation has now been amended to provide that on a specific application, RBI may allow a person to export or import Indian currency notes subject to such terms and conditions as specified by RBI.

(E) Prohibition for opening any Branch office / Liaison office / Project office or any other business place by foreign law firms.

RBI had earlier issued AP DIR Circular No. 23 dated 29^th October, 2015 wherein it was instructed that no fresh permissions / renewal of permissions shall be granted by RBI / AD Bank to any foreign bank for opening their liaison office in India as the matter was pending for disposal with the Supreme Court.

RBI has now issued AP DIR Circular No. 7 dated 23^rd November, 2020 wherein it has directed that foreign lawyers / foreign law firms / companies or any other person resident outside India will not be permitted to establish any branch office / project office / liaison office / any other place of business in India for the purpose of practising legal profession.

(F) Delegation of compounding powers to Regional offices / sub-offices of RBI.

RBI has issued AP DIR Circular No. 06 dated 17^th November, 2020 clarifying that post the Notification of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 in October, 2019 which superseded the earlier FDI Notification FEMA 20(R) / 2017-RB, compounding powers in relation to the following contraventions have been delegated to the Regional offices of the RBI.