The Ministry of Commerce and Industry via the Department for Promotion of Industry and Internal Trade has issued a Press Note No. 1 of 2022 series (‘Press Note’) on 14 March 2022 to amend the Consolidated FDI Policy Circular of 2020 (as amended from time to time) (‘FDI Policy’).
The Press Note is a result of the review by the Government of India of the existent FDI Policy to permit foreign investment in Life Insurance Corporation of India (‘LIC’) along with other modifications which were needed to bring clarity in respect of certain provisions of the existing FDI Policy.
The amendments as per the Press Note shall take effect from the date of the notification with respect to the rules under Foreign Exchange Management Act, 1999.
This update highlights the key amendments under the Press Note.
Amendments permitting foreign investment in LIC
With the LIC Initial Public Offer on the horizon, the Government of India, with a view to permit foreign investment in LIC has sought to amend the FDI Policy. The Press Note seeks to amend the following:
1- Definition of ‘Capital’
The note to the definition of ‘Capital’ has been amended to include equity shares issued under the provisions of ‘any other applicable law’ evidently to include equity shares issued under Life Insurance Corporation Act, 1956 (‘LIC Act’). This change will allow the Government of India, an easier path to permit foreign investment in other statutory companies as well.
2- Definition of ‘Foreign Investment’
The explanation to the definition of ‘Foreign Investment’ under the extant FDI Policy provided that any declarations of beneficial ownership under the Companies Act by a person resident outside India shall count towards ‘Foreign Investment’. The explanation has been expanded to include declarations of beneficial ownership made by a person under ‘any other applicable law’ evidently to include the declarations of beneficial ownership made under Section 5C of the LIC Act.
3- Definition of ‘Indian Company’
The definition of ‘Indian Company’ has been amended to include companies or body corporate established or constituted by or under any Central or State Act.
4-Addition of definition of ‘Share Based Employee Benefits’
A new definition of ‘Share Based Employee Benefits’ has been added to allow the issuance of capital instruments by a statutory body corporate to its employees resident outside India. It is imperative to note that this allowance has been added in order to allow LIC and other statutory body corporates to issue such benefits since earlier, the FDI Policy only spoke about ESOPs or sweat equity shares issued as per the Companies Act, 2013. Other Indian companies still can only issue ESOPs and sweat equity shares.
5- Foreign investment cap specifically for LIC
Paragraph 5.22 of the extant FDI Policy talks about the permissibility of foreign investment in the insurance sector. A new paragraph 188.8.131.52A has been inserted which specifies that foreign investment in LIC is permitted up to 20% of the equity share capital of LIC under the automatic route.
6- Other conditions applicable to foreign investment in LIC
Conditions that have been made applicable to foreign investment in LIC are:
- Foreign investment in LIC shall be subject to compliance with the LIC Act and provisions of the Insurance Act, 1938 that have been made applicable by Section 45 of the LIC Act.
- Foreign portfolio investment in LIC shall be governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and SEBI (Foreign Portfolio Investors) Regulations, 2019.
- Any foreign investment in LIC shall be subject to pricing guidelines issued by the RBI under the FEMA regulations.
Definition of subsidiary
The existing FDI Policy did not define the term ‘subsidiary’ leading to a lacuna in the FDI Policy. In light of the same, a definition for subsidiary has been added which in turn, provides the meaning to be the same as defined under the Companies Act, 2013.
The concept of Convertible Notes was introduced by Consolidated FDI Policy Circular of 2017 to aid investment into start-ups in the country. The definition thereunder mandated the conversion of the Convertible Notes into equity shares within five (5) years of issue of the Convertible Notes. This tenure has been extended to ten (10) years giving more flexibility to start up investors.
Amendments with relation to Real Estate Business
The extant FDI Policy in paragraph 5.1 specifies the sectors in which Foreign Direct Investment is prohibited and lists ‘Real Estate Business’ in paragraph 5.1(f) as one of the prohibited sectors. The explanation to paragraph 5.1(f) enumerates the activities excluded from the definition of ‘Real Estate Business’, however, it did not provide any clarity on what constitutes ‘Real Estate Business’. The Press Note amends the explanation by clarifying that ‘Real Estate Business’ means ‘dealing in land and immovable property with a view to earning profit there from …’ and retains the exclusions as per the extant FDI Policy. The Press Note also clarifies that income from rent or leasing of property which does not amount to transfer, will not be considered as ‘Real Estate Business’.
Reporting of issuance of ESOPs
The issuance of ESOPs by an Indian company to its employees resident outside India earlier had to be reported under the extant FDI Policy in FORM ESOP to the Regional Office of the RBI within 30 days of issuance. As per the Press Note, such reporting will now be made to the Foreign Exchange Department of the RBI in form “ESOP Reporting” within 30 days of issuance.
The Press Note amends the FDI Policy to allow foreign investment into LIC which will facilitate disinvestment by the Government and allow foreign investors to hold a stake in the country’s largest insurer. The other amendments to the FDI Policy are also welcome as they provide much needed clarifications and flexibility (in case of a longer convertible note tenure) to foreign investors.