Sarthak Advocates & Solicitors

Legal Alert

Foreign Direct Investment

1. Issue of equity shares under the Government route of the FDI scheme.

2. Amendment to the Foreign investment Norms in the Commodity Exchanges and NBFC Sector.

Issue of equity shares under the Government route of the FDI scheme

Reserve Bank of India (RBI) vide its circular dated May 08, 2012 bearing number RBI/2011-12/541 (“Circular 1”) has amended extant provisions of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (“Regulations”) dealing with the issue of shares against import of capital goods, machineries or equipments (including second-hand machineries).

Vide its earlier circular dated June 30, 2011 bearing number RBI/2010-11/586, RBI had allowed issue of equity shares/preference shares against the import of capital goods, machineries, or equipments (including second-hand machineries) under the Foreign Direct Investment (FDI) scheme, subject to prior Government approval. However, as per Circular 1, RBI has now prohibited issuance of equity shares/preference shares against import of second-hand machinery under the FDI scheme.

The said amendment has been carried out, to encourage use of latest machinery compliant with international standards and also to ensure that they are green, clean and energy efficient.

Amendment to the Foreign investment Norms in the Commodity Exchanges and NBFC Sector

1.    Commodity Exchange

RBI vide its circular dated May 08, 2012 bearing number RBI/2011-12/542 (“Circular 2”) has amended the earlier position notified vide circular dated April 28, 2008 bearing number RBI/2007-08/303, wherein, RBI had allowed foreign investment in commodity exchanges up-to a composite ceiling of 49%, with individual FDI and Foreign Institutional Investors (FII) limit being 26% and 23%, respectively. Earlier, both FDI and FII investments were subject to prior Government approval and shall be consistent with the applicable regulations issued by Forward Market Commission. Further, FIIs purchases in equity shares of Commodity Exchanges were restricted to only secondary markets.

As per Circular 2, prior Government approval shall be required only for the FDI component of the foreign investment. Government approval shall not be required for investment by registered FIIs in the commodity exchanges.

2.    Non Banking Finance Company (NBFC) Sector

Under the extant Regulations, ‘leasing and finance’ is one of the 18 NBFC activities, wherein FDI up to 100 per cent is permitted under automatic route, subject to minimum capitalization norms, as laid down in the Regulations. RBI vide Circular 2 has clarified that FDI is permitted only in ‘financial leases’ (financial leasing activity) and not in ’operating leases’ (operating leasing activity).