Foreign Investment in a Listed Company

Foreign Investment in a listed company by a person resident outside India, as a subject is regulated under Foreign Exchange Management Act, 1999 (“FEMA”) and Securities and Exchange Board of India (“SEBI”). Considering that in a listed company there are public shareholders, regulations around issue and transfer of equity investment in listed company are strict, restrictive and involves lengthy procedures.

Investment in equity capital of a listed company is in the nature of capital account transaction under the FEMA. Eligible investors for the same purposes are any person resident outside India. As an exception to same, any citizen / entity incorporated in a country which shares land border with India is allowed to invest only if approval from Government of India is obtained, even if investment is made under an automatic route.

Investment as above can be made in a listed company in the following form of equity instruments:

• Equity shares;
• Fully, Compulsorily and Mandatorily Convertible Debentures (“CCDs”);
• Fully, Compulsorily and Mandatorily Convertible Preference Shares (“CCPSs”);
• Share Warrants;
• depository receipts issued against equity instruments;

If any investment is made in non-convertible instruments, same is not considered as FDI and is governed under ECB regulations.

Investment in an unlisted company can be classified in following two baskets:

1. Investment on a non-repatriable basis by NRI / PIO;
2. Investment on a repatriation basis by a person resident outside India.

Let’s understand above provisions in details:

1. Investment on a non-repatriable basis by NRI / PIO:

Any foreign investment in a listed company, if made by NRI / PIO on a non-repatriable basis, it is considered as akin to domestic investment and accordingly, such investment would no longer hold colour of a foreign investment. Accordingly, in such cases, FEMA provisions would not apply so far as pricing norms and limit restrictions are concerned.

Also, if say a resident Indian who was holding investment in an equity instrument, later on shifts his / her place of residence and becomes NRI, such an investment would also be considered as investment on a non-repatriable basis as original investment was made domestically. 

Such investment can be transferred without any FEMA implications to another resident Indian or person resident outside India on a non-repatriable basis. It can also be transferred by way of gift to another NRI / OCI, subject to same being held on a non-repatriation basis. Such investment can be transferred to another non- resident on a repatriation basis, subject to sectoral cap, pricing guidelines and compliance requirements.

However, sale proceed of such equity instruments can only be repatriable under USD 1 million scheme. Remittance of dividend income, interest income can be made on a regular basis without any conditions.

Further considering investment made on a non-repatriable basis is akin to domestic investment, irrespective of % of investment, it would be domestic investment.

2. Investment on a repatriation basis by person resident outside India:

Any foreign investment in a listed company by a person resident outside India on a repatriable basis is considered as foreign direct investment (“FDI”). Eligible investors for this purpose include individual who are non-resident in India, including NRI, PIO and legal entities such as company, LLP, partnership firm and any legal entity form recognised, incorporated in a country outside India. Investment on a repatriation basis would mean an investment, the sale/ maturity proceeds of which are (net of taxes) eligible to be repatriated outside India.

Foreign investment in a listed company, on a repatriable basis is bifurcated further based on % of investment as under:

• • 10% or more of post issue paid up capital on a fully diluted basis from a person resident outside India is considered as foreign direct investment (“FDI”); and
  • Less than 10% of post issue paid up capital on a fully diluted basis from a person resident outside India is considered as foreign portfolio investment (“FPI”).

In case, subsequently, FDI investment falls below 10% of post issue paid up capital, on a fully diluted basis, it shall still be considered as FDI and cannot be reclassified into FPI. However, if FPI investment exceeds 10% of post issue paid up capital, on a fully diluted basis, it requires to get reclassified as FDI. In such case of reclassification, reporting needs to be made by filling Form APR and FC-GPR.

It is to be noted that FPI is different than foreign portfolio investor. FPI need not only be made by foreign portfolio investor, but can also be made by foreign company. Whereas foreign portfolio investor is a SEBI registered person governed under SEBI (Foreign Portfolio Investors) Regulations, 2014.

Such investment can be transferred to any person resident in India or to NRI/ OCI on a non-repatriable basis or to a person resident outside India on a repatriable basis.

When transfer is made to person resident outside India, on a repatriable basis, same shall be in compliance with pricing guidelines and sectoral limits and required approval from government needs to be obtained, wherever applicable, subject to entry routes and investment limits.

Pricing guidelines for a FDI on a repatriation basis is as under:

Above are the provisions under FEMA for any listed company issuing equity instruments to a non-resident whether on a repatriable or non-repatriable basis. However, considerations to income tax laws, regulatory laws like SEBI and Companies Act, 2013 shall also be given for determining foreign investment in a listed company.

For more detailed discussion on the above subject, please do not hesitate to connect at contact@devadhaantu.in