Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019

What it does

The Regulations were issued by the Reserve Bank of India in October 2019 under the Foreign Exchange Management Act, 1999, together with the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 made by the Central Government. The division of work between them is the key to reading either. The Rules say what investment a non-resident may make, in what instruments and sectors, and on what pricing and conditions. The Regulations say how the money is to move and what must be reported afterwards.

On the first part, the Regulations require that the consideration for an investment by a person resident outside India be paid through the banking channel, from an account that the investor is entitled to use, and in the manner the Regulations specify. On the second part, they require the Indian investee, the transferor or the transferee, as the case may be, to report the transaction to the Reserve Bank in the prescribed form and within the prescribed time. The reports are made through an online reporting system of the Reserve Bank.

Who it binds

The Indian company or limited liability partnership that receives foreign investment, the non-resident investor, and a resident or non-resident who buys or sells the securities. The banks that handle the remittance have their own obligations under the same framework, since they certify the receipt of funds and the purpose of remittance. The Regulations are addressed to non-debt instruments, which are chiefly equity shares, convertible and partly paid instruments, investment in units, and the capital of a limited liability partnership. Debt instruments are governed separately.

What has changed, and when

The Regulations were issued with the new rules for non-debt instruments in October 2019 and replaced the earlier regulations on the issue and transfer of securities by persons resident outside India. The Reserve Bank has amended them since, to align the reporting forms and the timing with changes in the Rules and in its own systems, so the version in force on the date of a transaction is the one that governs it. The related Master Directions that compile the reporting requirements are also revised from time to time.

What turns on it in practice

Compliance under these Regulations is a matter of timing and form. An issue of shares to a non-resident is reported on a form that records the allotment, and a transfer of shares between a resident and a non-resident is reported on a different form, each within a stated period from the event. Funds that arrive from the wrong account, or that are held for longer than the permitted period before allotment, are a default of the mode of payment, and a late or incorrect report is a default of reporting. Each can be regularised, usually by compounding, but at a cost in time and money and with an effect on the transaction timetable.

For a transaction lawyer, the reporting work is part of closing. The documents for an acquisition, joint venture or restructuring involving a non-resident should provide for who will make each report, when, and with what information, since a default is felt by the Indian company even where the investor caused it. A diligence review of the target's past foreign investment also starts with these reports, which show whether every allotment and transfer was made in accordance with the framework. That is part of the transaction advisory work this practice does, and the Regulations are read with the Foreign Exchange Management Act, 1999 and the Non-debt Instruments Rules, 2019.