Issue of Securities: A Glimpse into the new FDI Regime

18 May 2018 • Simratjeet Kaur


Issue of Securities: A Glimpse into the new FDI Regime

18 May 2018 • Simratjeet Kaur

To any foreign investor looking into an opportunity to invest in India, one of the primary concerns is the time required to set up a legal entity in India and how simple / difficult it is to get various registrations / approvals, if any, and the compliance regime of the country. Indian Government had been proactively involved for past few years to improve India’s standing in ease of doing business and has achieved remarkable success in doing so. The Government has worked well to reduce the time taken for incorporating a company in India. It introduced steps such as an integrated incorporation form called SPICe. Various forms such as the Name Application form, the DIN Application form for the proposed directors, the Incorporation form and the PAN and TAN application (PAN and TAN are separate registrations required under Income Tax, Act) have been combined into a single form. Such an integrated form has decreased the time taken to properly set up a company from max 30-40 days to a total of 3 – 4 days.

With simplification of incorporation process, the first concern, i.e. the time taken to set up an entity has been effectively dealt with. Next series of changes have been introduced to deal with the complexities in the compliance regime prevalent in India. In a bid to simplify the existing compliances with respect to the Foreign Direct Investment, the Indian Government came out with major notification (Notification No. FEMA 20(R)/ 2017-RB) dated November 07, 2017, which seeks to revamp regulations to regulate investment in India by a Person Resident Outside India. The Regulations are Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 [hereinafter referred to as NEW FDI Regulations].

We have covered the major changes introduced in the NEW FDI Regulations in a series of blogs. The first blog is dedicated to the simplification of issue of securities to Non resident. The existing FEMA Regime and the Companies Act 2013 were not on par with each other. The disconnect was related to the time prescribed for allotment of securities, treatment of expenses incurred for incorporating a new entity in India, issue of securities to NRIs and its subsequent reporting and the consequence of delay in reporting of the compliances mentioned under the FEMA regime. The changes introduced have been listed out below as follows:

  • Issue of Securities:

There was mismatch in time limit with respect to the allotment of securities under the FEMA and the Companies Act, 2013. The earlier FDI regime gave time of 180 days from the date of receipt of consideration to allot the securities. However, the Companies Act, 2013 mandated that the securities be allotted within 60 days from the date of receipt of consideration. This disparity among the two Regulations caused great difficulty as the Companies were not clear if they get additional time to allot securities in cases of FDI. This anomaly has been removed by the RBI and the New FDI Regulations have now been aligned with that of Companies Act, 2013 (60 days).

  • Issue of Capital Instruments against Pre-incorporation expenses:

Pre-incorporation expenses are the expenses generally incurred by founders / promoters on account of Government and professional fees paid to the consultant prior to incorporation. The New FDI Regulations has paved way for issue of Capital Instruments against pre-incorporation expenses of the Wholly Owned Subsidiaries set up in India by a Non-Resident Entity operating in a sector where 100 % FDI is allowed. Investment in almost all the sectors are under 100% automatic route except sectors like retail, real estate, defence, etc. Conditions specified by RBI for the same are as follows:

      • Capital Instruments to be issued up to a limit of 5 % of the Authorised Capital or USD 500,000, whichever is less.
      • Reporting to be made to RBI in form FC-GPR within:
        • 30 days from the date of issue of capital instruments
        • But not later than 1 year form the date of incorporation
      • A Certificate from the Statutory Auditor of the Company to be submitted along with form FC-GPR stating that, the pre-incorporation expenses against which the capital instruments have been issued, have been utilised for the purpose for which it was received.


Please note that Form FC-GPR has been integrated into Single Master Form (SMF) w.e.f. 1st September, 2018. To read more about the same, please visit Single Master Form (SMF) And The New Filing Platform FIRMS.


  • Streamlining of Issue of shares through Rights Issue and Bonus Issue:

The NEW FDI Regulations have streamlined the issue of shares under the right issue and bonus issue. One major change introduced is that the right shares can now be renounced by a person resident outside India in favour of another person resident outside India. Such renunciation of right shares was not possible in the earlier regime. This will result in much convenience in issuing shares through rights issue to a non resident (in whose favour the rights have been renounced), even if he is not an existing shareholder.  Please note that if the shares are issued as preferential issue / private placement, a stringent procedure needs to be followed under Companies Act, 2013 (unlike rights issue).

  • Capital instruments being issued on repatriable or non-repatriable basis to NRI:

There was some ambiguity in the FDI regime prior to issue of 2017 Regulations, on treatment of the shares issued on repatriable and on non-repatriable basis to an NRI. This ambiguity has been resolved now by clearly stating that securities issued on non-repatriation basis to NRI is treated as domestic investment and therefore, no FEMA compliances are required.

  • Delays in Reporting:

Under the previous FDI regime, if the Companies failed to report FDI transactions within the prescribed time, they had to go for compounding of the offences, unless condoned (offence being the delay in reporting). FDI involves coordination with the authorised dealer bank and the remitter bank. It also involves compliances under other Regulations, like Companies Act.  Many Companies could not, therefore, make timely reporting under FEMA. However, the RBI, taking a liberal view on such procedural lapses in line with the provisions of the Companies Act, 2013. Instances of delay in such reporting shall be regularised (without having to go for compounding) subject to payment of late fees.


Effective from 23rd October, 2018

  • Form ESOP(Employees Stock Option): An Indian company issuing Employees stock option to persons resident outside India who are its employees/directors or employees/directors of its holding company/joint venture/wholly owned overseas subsidiary/subsidiaries Shall file form ESOP within 30 days of issue of employees stock option.

  • Form DRR (Depository Receipt Return): The Domestic Custodian shall report in Form DRR, the issue/transfer of depository receipts in accordance with the Depository Receipt Scheme, 2014 within 30 days of close of issue.

  • Form DI (Downstream investment): An Indian entity or an investment vehicle making downstream investment in another Indian entity which is considered as indirect foreign investment for the investee Indian entity in terms of Rule 22 of the Rules shall file FORM DI with the RBI within 30 days from the date of allotment of equity instruments.

Effective from 5th February, 2019

  • Form InVI (Investment vehicle): An investment vehicle which has issued its units to persons resident outside India shall file within 30 days from date of issue of units.

Reporting Requirements

Reporting regarding issue or transfer of Convertible notes shall be made in Form CN within 30 days of issue/transfer.

FDI Reporting in Form FCGPR under SMF shall be made within 30days of issue of equity instruments.


  1. Can preliminary expenses be considered as share capital of a company where the directors who have incurred preliminary expenses and do not want to infuse capital ?

    2 situations : a) what if directors and shareholders are the same
    b)if directors and shareholders aren’t same

    1. Preliminary expenses incurred by the Directors can be considered as the share capital of the Company provided that there was an agreement regarding the same prior to incorporation.
      This holds whether the expenses were made by the person as a promoter who is or isn’t the director/shareholder of the company.

  2. Can company take unsecured loan from its foreign directors? is there any restriction under FEMA, Companies Act 2013 or RBI Act for acceptance of loan from foreign directors?

    1. As per the provision of Companies Act, 2013 a private company can accept loan from its directors, but the director has to give a declaration in writing that money is not given out of borrowed funds and company shall disclose it in the Board’s report.
      However, such loan taken by Foreign Director shall be termed as External Commercial Borrowings (ECB) under FEMA, 1999 and compliance of the same shall be made according to the ECB regulations.

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