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All you need to know about Regulation 16 of FEMA 20 R

Varun Hariharan

| Updated: Sep 09, 2020 | Category: FEMA

Regulation 16 of FEMA

Regulation 16 of FEMA 20R has been provided by the Reserve Bank of India wide circular Notification No. FEMA 20(R)/ 2017-RB relates to Transfer or Issue of a particular security or capital instrument by an Individual resident outside India. Hence, this regulation would not only cover individual residents outside India but would also include foreign entities and limited liability partnerships which are formed outside India.

The Reserve Bank of India (RBI) under Regulation 16 of FEMA has brought the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 which deals with the transfer of security from a foreign company or a resident outside India to an Indian company. Transfer here would be the acquisition of particular securities or would also include the purchase of these securities.

Definitions under Regulation 16 of FEMA 20 R

The Reserve Bank of India has authorized specific entities to deal with foreign exchange under these regulations. These entities are considered special banks under the Foreign Exchange Management Act[1], 1999 (FEMA).

The following definitions would be required to be interpreted for understanding:

  • Authorized Dealer- An authorized dealer is an institution which is authorized by the RBI to carry out specific transactions related to foreign exchange.
  • Transfer- This would relate to the dealing of specific capital security or the instrument which is present under this legislation. Capital instruments under this regulation would include equity shares, preference shares, convertible debentures, and non-convertible debentures.
  • Sector Caps- Sector caps relate to a specific investment which is allowed under this legislation under a repatriable basis. This will only be considered as a sector cap if there is a transfer of capital instrument from a foreign company to an Indian company. Government approval will only be required if the above criteria have been satisfied with the treatment of relevant sector caps.

Regulation 16 of FEMA 20R

Regulation 16 of FEMA 20R emphasizes the routes for foreign investment in India, the permitted caps which would be required for foreign investment, and the sector caps which would be required as applicable. Apart from seeking prior approval from the government, some form of foreign investments would require approval from a specific government authority.

Different Types of Routes for FDI under Regulation 16 of FEMA

There are different routes for foreign direct investment. These routes would be applicable where the foreign investment is coming either from a resident outside India (NRI) or a foreign company or a Limited Liability Partnership (LLP).

The following routes would apply to foreign direct investment:

  • Automatic Route- Under the automatic route, there is no form of prior approval required from the Government of India. Hence, foreign direct investment under the automatic route is without any form of restrictions. However, there are specific sectors where only up to 49% is allowed through the automatic route. The rest would require approval from the government under the Government Route.
  • Government Route- This route is also known as the approval route. Regulatory approval would be required for specific form of investment. If an investor has to invest in a particular sector which requires government approval, then such approval is required. Without this approval, the foreign direct investment under regulation 16 of FEMA would not be allowed. For example, in the recent FDI amendment, neighbouring countries that share a land border with India, the government made it mandatory for foreign investments requiring government approval.
  • Aggregate Foreign Portfolio Investment- This means that 49% of the paid-up capital or the sector caps whichever is lower will not require any form of approval from the government. This condition is present if there is no form of transfer of ownership from the Indian company to the foreign-owned entity. Here the transfer of ownership will also include any form of transfer of controlling interests to the foreign entity.

Sectors which foreign direct investment is allowed under Regulation 16 of FEMA 20 R

Under specific sectors, 100% foreign direct investment is allowed. However, the approval process would vary depending on the sector in which foreign investment is allowed.

The following sector caps are for foreign direct investment:

Animals and Animal Husbandry Sector

This sector would include activities such as floriculture, horticulture, and development of animal husbandry. This would also include pisciculture, aquaculture, and apiculture, and all related forms of activities. All allied activities in the sector would include the plantation of flowers and bringing up of florist type of activities. Growing Mushrooms would also be included under this sector. All the activities must take place in some form of controlled environment or controlled conditions.

Controlled conditions mean something which is not natural for the nourishment of activities carried out in this sector. Any form of artificial way of taking care of plants would come under the definition of controlled conditions. This would include the use and development of greenhouses for growing plants and other crops. The development of plants using some form of microclimatic conditions would also be included under the definition of controlled activates under regulation 16 of FEMA 20R.

For the above sector, 100% investment is allowed under the automatic route.

Plantation

This sector would include any form of activities which grow plant and other forms of products.

The following would come under the plantation sector:

(a) Tea sector including tea plantations;

(b) Coffee plantations and other related plantations;

(c) Rubber and related plantations;

(d) Cardamom plantations;

(e) Palm oil tree plantations; and

(f) Olive oil tree plantation.

Under this sector, 100% foreign direct investment is allowed and does not require any form of approval from the government.

Mining Sector

Mining would include gold, diamond, silver, and other forms of precious stones. These products will not involve mining of elements which contain a specific form of titanium materials and products. This sector is subject to a specific regulation that is the Mines and Minerals (Development & Regulation) Act, 1957. Under this sector, 100% FDI is allowed under the automatic route.

Coal and Lignite

This sector will include coal and other forms of lignite products used in industrial houses. This would be allowed under regulation 16 of FEMA 20R. While washing of coal-based products is allowed under this, coal mining is not allowed. Neither is selling of washed coal or activities which involve coal processing. FDI under this is 100%, and no form of approval is required from the government.

Minerals and Mine Separation

This would include mining elements that bear some form of titanium elements. This is regulated under the Mines and Minerals (Development and Regulation) Act, 1957. For this activity, 100% FDI is permitted; however, government approval is required.

There are specific conditions related to the above sector:

  • Value-added conditions such as the transfer of technology for this sector under regulation 16 of FEMA 20R.
  • Disposal of wastes must comply with relevant atomic energy laws.
  • Board approval from the respective energy as well as the atomic board’s must be taken for approval.
  • Foreign investment will not be allowed in this sector to carry out mining based activities.

Petroleum

In these sector activities such as exploration, marketing, research and development, and taking out petrol-based products are allowed by private companies.  If these activities are conducted privately, then approval is not required by the government, and 100% foreign investment is allowed.

However, if government undertakings conduct these activities, then 49% of investment would be allowed under the automatic route. The rest of the investment that is 51% would require approval from the government.

Manufacturing

In the manufacturing sector, 100% foreign direct investment is allowed through the automatic route. This sector would include both the segments, i.e. wholesale segment and the retail segment. Manufacturing for the e-commerce sector would also be included in this process.  Manufacturing for food processing activities would be covered under this sector. Regulation 16 of FEMA 20 R would cover the above activities.

Defence

Under the Industries (Development and Regulation) Act, 1951, an industrial license can be secured for carrying out any form of defence activities.  For manufacturing arms and ammunition such as guns, specific permission would be required from the respective authority. Manufacturing ammunition must comply with the Arms Act, 1959. For this sector, up to 49% investment is allowed through the automatic route. If more than 49% of investment is present, then government approval would be required where the investor has some form of access to modern technologies.

There are specific conditions which have to be followed by the investee under this sector (regulation 16 of FEMA 20R):

  • If there is any form of change in ownership structure, then approval would be required under the government route.
  • Specific permission would be required either from the DPIIT, Ministry of Commerce, Ministry of Defence, and the Ministry of External Affairs if required.
  • Investee Company must have the necessary sources for carrying out proper life cycles within a year.

Broadcasting

The broadcasting sector would include carriage services for broadcasting such as:

  • Direct to Home Connections;
  • Teleports Connections;
  • TV which is used on Mobile;
  • SKY broadcasting services; and
  • Networks which are run over the cable.

For the above services, foreign direct investment is allowed under the automatic route. More than 100% FDI is allowed under this route.

Content Broadcasting Services

  • Terrestrial Broadcasting services- 49% investment here would be allowed only through the government route.
  • Unlinking services such as News and Current Affairs would require government approval. 49% of investment would be allowed under this route.
  • Non-Unlinking services – 100% would be allowed under the automatic route.

Apart from this, there are specific conditions which have to be followed by the investee, such as regulatory compliance with the relevant telecommunication authority.

Print Media

  • News and other current affairs, only 26% foreign investment is allowed, and government approval is required under this sector. (regulation 16 of FEMA 20R)
  • Publishing Indian content in Foreign Magazines, 26% foreign investment is allowed, and government approval is required for this.
  • Publishing similar content of foreign newspapers, 100% foreign investment is allowed. However, government approval would be required for the same under regulation 16 of FEMA 20R.
  • Companies that carry out print media services must be registered as a company under the companies act 2013 and have a registered office in India.

Aviation and Civil Aviation

In this sector, 100% foreign direct investment is allowed for the development of airports and other forms of infrastructure. This would include both Greenfield projects and existing projects. 100 % investment is allowed under this sector for the above under the automatic route.

For any form of airport-related transfer services such as domestic airways as well as commercial airlines, then 49% of investment would be allowed through the automatic route. If the investment is coming through a Non –Resident Indian or an OCI, then 100% investment would be allowed through the automatic route.

Helicopter services and other forms of transport under regulation 16 of FEMA 20 R do not require any prior approval from the government of India. 100% investment would be allowed in such sectors.

Civil Aviation services which include manufacturing and maintenance activities of aircraft, 100% foreign direct investment is allowed through the automatic route.

Specific approval would be required from the Director-General of Civil Aviation for specific approvals.

Construction Sector

Under regulation 16 of FEMA 20 R, the construction sector would include the development of townships and other residential complexes. This can be the construction of bridges, towns, hotels, and other forms of structures. 100% of foreign direct investment is allowed for such activities, and no approval from the government is required.

Industrial Parks

For the development of Information technology parks, software technology parks, and other forms of industrial parks, no approval from the government would be required. Foreign direct investment under this route will be allowed to 100%.

Satellites

For the development and launching of satellites, 100% foreign investment would be allowed. However, this investment would be subject to approval from the government. Apart from this specific approval is also required either from the Department of Space and the ISRO.

Private Security Agencies

Under regulation 16 of FEMA 20R, 49% of foreign direct investment is allowed for regulation of security agencies.

Telecommunication Providers

This will include all forms of local as well as international telecommunication providers.  100% foreign direct investment is allowed under this sector. 49% is allowed under the automatic route, and if more than 49% is present, then government approval is required.

Trading and Retail Spaces

  • E-commerce Sector- Business to Business Services- 100% foreign direct investment is allowed under this sector.
  • Model for E-commerce Sector- 100% foreign direct investment is allowed for such businesses.
  • SBRT- Single Brand Retail Trading-100% foreign direct investment is allowed through this route. 49% FDI is allowed under the automatic route, and the rest is allowed through the government route.
  • MBRT- Multi-Brand Retail Trading- Here only 51% FDI is allowed. However, in the 2018 amendment, there are specific changes to the amount of foreign investment that is allowed under this for regulation 16 of FEMA 20R.
  • 100% FDI is allowed under the automatic route for duty-free shops.

Pharmaceutical Sector

Under regulation 16 of FEMA 20R, 100% foreign direct investment is allowed for the development of Greenfield projects in the pharmaceutical sector.  This is allowed through the automatic route. Whereas for Brownfield projects, 100% of foreign direct investment is allowed. However, only 74% is allowed under the automatic route, and 26% is for the government route. Apart from this, there are specific conditions that have to be adhered by the respective parties.

Railway Infrastructure

Railway services such as cargo transport, transport of chemicals, transport of metals, and passenger carrier services would come under railway services. Construction and development of railway services would also be included under railway infrastructure services. 100% foreign investment is allowed under this route.

Financial Services

  • ARC- Asset Reconstruction Companies- 100 % foreign investment is allowed through the automatic route under regulation 16 of FEMA 20R.
  • Banking
    • Private Banks- 74% of foreign investment is allowed under this sector. For the automatic route, up to 49% of investment is allowed. If the investment is more than 49%, then government approval is required for this. However, the investment value is capped at 74%.
    • Public Sector Banks- Only 20% of foreign direct investment is allowed under regulation 16 of FEMA 20R.
    • Insurance Sector- 49% is allowed; however, this has been recently amended, allowing more than 74% of foreign direct investment is allowed under the automatic route.

Hence, if a foreign investor wants to invest in the above sector, then following sector caps are required to be followed regarding foreign investment.

Conclusion


Under regulation 16 of FEMA 20R, the government of India has brought out different sector caps for foreign investment. Foreign direct investment is allowed under the respective routes. If approval is required for a specific investment, then the same has to be taken. However, for specific sectors apart from approval from government authorities, approval from other departments is also required.

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Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.



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