The Reserve Bank of India (RBI) last week issued a series of circulars liberalizing and streamlining its policies on various types of equity investments as well as on external commercial borrowings (ECBs). The key pronouncements are highlighted below:
1. Foreign Investment in “Other Financial Services”
In the case of non-banking finance companies (NBFCs), foreign investment is allowed up to 100% under the automatic route in case of 18 activities that are listed in the schedule to the relevant RBI regulations. Under Circular No. 8 issued on October 20, 2016, the RBI has extended this treatment (i.e. 100% foreign investment under the automatic route) to “other financial services”, which includes activities that are regulated by any financial sector regulator such as the RBI, the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority (IRDA), and the like. This is subject to appropriate conditionalities as may be imposed by the relevant regulator. However, if the activity is either not regulated or its regulatory status is unclear, then the foreign investment will be allowed only under the Government approval route.
2. Investment by a Foreign Venture Capital Investor (FVCI)
FVCIs are now permitted to make investments in certain sectors without requiring any approval from the RBI. In case of unlisted companies, FVCIs can make investments in equity, equity-linked instruments or debt instruments in specific sectors, which include biotechnology, IT, nanotechnology, etc. as listed in RBI’s Circular No. 7 issued on October 20, 2016. However, an FVCI can invest into a “startup” irrespective of the sector in which such startup is engaged. A “startup” is defined as a private limited company, registered partnership firm or a limited liability partnership (LLP) which is not older than five years, and with an annual turnover not exceeding INR 25 crores in any preceding financial year, and is working in areas driven by technology or intellectual property as specified.
3. Review of Sectoral Caps
Pursuant to various changes announced by the Government of India to conditions specific to various sectors, the RBI by way of Circular No. 6 dated October 20, 2016 announced a process of simplification for foreign direct investment (FDI). Among the key changes are: imposition of a composite sectoral cap encompassing all types of foreign investment, prescriptions on total foreign portfolio investment, specifications regarding ownership and control of entities by Indian citizens, foreign investment in LLPs, stipulations regarding foreign investment by swap of shares, and so on.
4. Extension and Conversion of ECBs
Under the ECB guidelines, designated AD Category-1 banks are allowed to approve requests from borrowers for changes in repayment schedules on certain conditions, so long as these are made during the tenure of the ECB (i.e. prior to maturity). However, under Circular No. 10 dated October 20, 2016, the RBI has allowed designated AD Category-1 banks to approve the extension of matured but unpaid ECBs, subject to certain conditions. The approval also extends to allowing conversion of “matured-but-unpaid” ECBs into equity. This will provide greater flexibility to the borrowers and lenders to structure appropriate arrangements in case of failure of repayment upon maturity of the ECB.
All of the above measures are intended to increase the availability of fundraising opportunities for Indian companies from various types of foreign investors as well as lenders.