**Executive Summary:**
This notification, titled the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Amendment Regulations, 2018, amends the 2017 regulations concerning foreign investment in India. These amendments, effective from the date of publication in the Official Gazette, address foreign investment in investing companies, Air India Ltd., single-brand retail trading, sourcing norms, and other sectors.
**Key Points / Main Content:**
* **Investing Companies:**
* Foreign investment in investing companies not registered as NBFCs or CICs requires prior Government approval.
* Foreign investment in investing companies registered as NBFCs is permitted under the 100% automatic route.
* Mandatory joint audit if a foreign investor specifies a particular auditor/audit firm with an international network.
* **Air Transport Services:**
* Scheduled Air Transport Service: 100% Automatic up to 49%, Government route beyond.
* Regional Air Transport Service: up to 100% for NRIs and OCIs.
* Foreign investment in Air India Ltd., including foreign airlines, is capped at 49%, with substantial ownership and effective control remaining with Indian Nationals.
* **Real Estate Broking Services:**
* Real estate broking services are excluded from the definition of real estate business, with 100% foreign investment allowed under the automatic route.
* **Single Brand Retail Trading (SBRT):**
* SBRT is permitted for a specific brand, either directly by the brand owner or through a legally tenable agreement.
* SBRT entities can set off incremental sourcing of goods from India for global operations against the mandatory 30% sourcing requirement for the first five years.
* Sourcing norms are not applicable for the first three years for entities dealing with 'state-of-the-art' and 'cutting-edge' technology products where local sourcing is not possible.
* **Other Amendments:**
* The word "handicap" is replaced by "disability."
* Definition of invitro diagnostic device is substituted with a new definition.
* **Schedule 1 Amendment:**
* An Indian company in an automatic route sector can issue capital instruments to a person resident outside India against swap of capital instruments, import of capital goods, or pre-operative expenses. Government approval is required for companies in sectors under the government route.
**Impact Analysis:**
**Investing Companies (including NBFCs and CICs)**
* *Impact*: Impacts entities involved in foreign investment in Indian investing companies, including NBFCs and CICs.
* *Action Required*: Ensure compliance with the revised approval requirements based on the registration status (NBFC or non-NBFC) of the investing company.
**Air India Ltd.**
* *Impact*: Affects foreign entities and airlines planning to invest in Air India Ltd.
* *Action Required*: Ensure compliance with the 49% investment cap and the requirement for substantial Indian ownership and control.
**Single Brand Retail Trading Entities**
* *Impact*: Affects entities engaged in single-brand retail trading with foreign investment.
* *Action Required*: Understand the revised sourcing norms, including the provisions for incremental sourcing and exemptions for 'state-of-the-art' and 'cutting-edge' technology products.
**Real Estate Brokers**
* *Impact*: Impacts entities engaged in real estate broking services.
* *Action Required*: Utilize the allowance of 100% foreign investment under the automatic route
**Indian Companies issuing Capital Instruments**
* *Impact*: Impacts Indian companies issuing capital instruments to persons resident outside India.
* *Action Required*: Comply with the conditions prescribed by the Central Government and the Reserve Bank, and obtain Government approval where required.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the foreign exchange market.
Foreign Exchange Management Act, 1999: An Act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Foreign Exchange Management Transfer or Issue of Security by a Person Resident outside India Regulations, 2017: Regulations pertaining to the transfer or issue of security by a person resident outside India.
Non-Banking Financial Companies (NBFCs): Financial institutions that provide banking services without meeting the legal definition of a bank.
Core Investment Companies (CICs): A type of Non-Banking Financial Company (NBFC) in India which primarily holds equity shares of other companies.
Air India Limited: The former flag carrier airline of India, now owned by Tata Group.
NITI Aayog: The National Institution for Transforming India, a policy think tank of the Government of India.
Department of Industrial Policy and Promotion (DIPP): A department under the Ministry of Commerce and Industry in India, responsible for formulation and implementation of industrial policy and promotion of foreign investment.
Reserve Bank of India
Foreign Exchange Department
Central Office
Mumbai
Notification No.FEMA.20(R) (1)/2018-RB March 26, 2018
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India)
(Amendment) Regulations, 2018
In exercise of the powers conferred by clause (b) of sub-section (3) of Section 6 and Section 47 of the Foreign
Exchange Management Act, 1999 (42 of 1999), the Reserve Bank of India hereby makes the following amendments
to the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India)
Regulations, 2017 (Notification No. FEMA. 20 (R)/2017-RB dated November 07, 2017) (hereinafter referred to as
'the Principal Regulations'), namely:-
1. Short Title & Commencement
(i) These Regulations may be called the Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) (Amendment) Regulations, 2018.
(ii) They shall come into force from the date of their publication in the Official Gazette.
2. Amendment to Regulation 16.B
In Regulation 16.B,
(i) The existing sub-regulation 5, shall be substituted by the following namely:
“(5) (a) Foreign Investment in investing companies not registered as Non-Banking Financial Companies
with the Reserve Bank and in core investment companies (CICs), both engaged in the activity of investing in
the capital of other Indian entities, will require prior Government approval.
Note: Compliance to these Regulations by the core investment companies is in addition to the compliance
of the regulatory framework prescribed to such companies as NBFCs under the Reserve Bank of India Act,
1934 and regulations framed thereunder.
(b) Foreign investment in investing companies registered as Non-Banking Financial Companies (NBFCs)
with the Reserve Bank, will be under 100% automatic route.
(ii) After the existing sub-regulation 7, the following shall be inserted namely,
“(8) Wherever the person resident outside India who has made foreign investment specifies a particular
auditor/ audit firm having international network for the audit of the Indian investee company, then audit of
such investee company shall be carried out as joint audit wherein one of the auditors is not part of the same
network.”
(iii) The existing SL. No 9.3(a) shall be substituted by the following, namely:
(a) (i) Scheduled Air Transport Service/ 100% Automatic up to 49%
Domestic Scheduled Passenger Airline Government route beyond
(ii) Regional Air Transport Service 49%
(Automatic up to 100% for
NRIs and OCIs)(iv) In SL.No 9.5, after clause (c), the following shall be inserted, namely:
“(d) In addition to the above conditions, foreign investment in M/s Air India Limited shall be subject to the
following conditions:
(i) Foreign investment in M/s Air India Ltd., including that of foreign airline(s), shall not exceed
49% either directly or indirectly.
(ii) Substantial ownership and effective control of M/s Air India Ltd. shall continue to be vested in
Indian Nationals.”
(v) In SL.No 9.5, Note (3) shall be deleted.
(vi) In SL. No 10.2, after Note 6, a new Note 7 shall be inserted, namely:
“(7) Real estate broking services shall be excluded from the definition of “real estate business” and 100%
foreign investment is allowed in real estate broking services under automatic route.”
(vii) In SL.No 15.3, under the column Entry route, the words, “Automatic up to 49%; Government route beyond
49%” shall be substituted by the words “Automatic”.
(viii) In SL.No 15.3.1, the existing clause (d) shall be substituted by the following, namely:
“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.”
(ix) In SL.No 15.3.1, clause (g) and clause (h) shall be deleted.
(x) In SL.No 15.3.1, after the omitted clause (h), the following shall be inserted, namely
“(i) Single brand retail trading entity shall be permitted to set off its incremental sourcing of goods from
India for global operations during initial 5 years, beginning 1st April of the year of the opening of first store,
against the mandatory sourcing requirement of 30% of purchases from India. For this purpose, incremental
sourcing shall mean the increase in terms of value of such global sourcing from India for that single brand
(in INR terms) in a particular financial year from India over the preceding financial year, by the non-
resident entities undertaking single brand retail trading, either directly or through their group companies.
After completion of this 5 years period, the SBRT entity shall be required to meet the 30% sourcing norms
directly towards its India’s operation, on an annual basis.”
(xi) In SL.No 15.3.1, Note 2 and Note 3 shall be deleted.
(xii) In SL.No 15.3.1, the existing Note 5 shall be substituted by the following, namely:
“Sourcing norms will not be applicable up to three years from commencement of the business i.e. opening
of the first store for entities undertaking single brand retail trading of products having 'state-of-art' and
'cutting-edge' technology and where local sourcing is not possible. Thereafter, condition mentioned at
15.3.1(e) above will be applicable. A Committee under the Chairmanship of Secretary, DIPP, with
representatives from NITI Aayog, concerned Administrative Ministry and independent technical expert(s)
on the subject will examine the claim of applicants on the issue of the products being in the nature of ‘state-
of-art’ and ‘cutting-edge’ technology where local sourcing is not possible and give recommendations for
such relaxation.”
(xiii) In SL.No 16.3, in Note 2, in clause (a), in sub-clause (ab), the existing word “handicap” shall be substituted by
the word, “disability”.
(xiv) In SL.No 16.3, in Note 2, clause (c) shall be substituted by the following, namely:
“in-vitro diagnostic device which is a reagent, reagent product, calibrator, control material, kit, instrument,
apparatus, equipment or system, whether used alone or in combination thereof intended to be used for
examination and providing information for medical or diagnostic purposes by means of examination of
specimens derived from the human bodies or animals.”
(xv) In SL.No 16.3, the existing Note 3 shall be deleted.
(xvi) In SL.No F.6.1, the existing clause (a) shall be deleted.3. Amendment to Schedule 1
In Schedule 1,
(i) The existing Para 1 (4), shall be substituted by the following namely:
(4) An Indian company may issue, subject to compliance with the conditions prescribed by the Central
Government and/or the Reserve Bank from time to time, capital instruments to a person resident outside India,
if the Indian investee company is engaged in an automatic route sector, 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.).
Provided Government approval shall be obtained if the Indian investee company is engaged in a sector
under Government route. The applications for approval shall be made in the manner prescribed by the
Central Government from time to time.
(ii) The existing Para 1 (6), shall be deleted:
(Shekhar Bhatnagar)
Chief General Manager-in-Charge
Foot Note:-
The Principal Regulations were published in the Official Gazette vide G.S.R. No. 1374(E) dated November 07, 2017
in Part II, Section 3, sub-Section (i).and subsequently amended as under
G.S.R. No. 279(E) dated 26.03.2018