{"id":14580,"date":"2019-03-11T15:11:25","date_gmt":"2019-03-11T09:41:25","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=14580"},"modified":"2021-02-08T16:55:17","modified_gmt":"2021-02-08T11:25:17","slug":"foreign-investors-under-fema","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/foreign-investors-under-fema\/","title":{"rendered":"Protection of Exit Clauses for Foreign Investors under FEMA\ufeff"},"content":{"rendered":"<h2 class=\"wp-block-heading\"><strong>What\nis the worth of FDI to a country like India?<\/strong><\/h2>\n\n\n\n<p>Foreign Direct Investment (FDI) is very crucial in the fortification and strengthening of an economy. In the context of the Indian Economy, Foreign Direct Investment has helped develop key sectors in India like infrastructure. It has brought in newer technologies to the Indian soil; it has led to increased capital inflow; it has helped develop the export sector; there have been more employment opportunities created, and have also helped strengthen the financial sector of the country. Foreign in-flows also help stabilize the exchange rate of a nation and over a period, leads to the overall improvement in the living conditions and lifestyle of the general public of the country. This article describes the Protection of Exit Clauses for Foreign Investors under FEMA.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Foreign\ninvestment figures of India in recent years<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-table table table-bordered\"><table><tbody><tr><td>\n  <strong>Financial\n  year<\/strong>\n  <\/td><td>\n  <strong>FDI (USD\n  million)<\/strong>\n  <\/td><\/tr><tr><td>\n  2017-18\n  <\/td><td>\n  37366\n  <\/td><\/tr><tr><td>\n  2016-17\n  <\/td><td>\n  36317\n  <\/td><\/tr><tr><td>\n  2015-16\n  <\/td><td>\n  36068\n  <\/td><\/tr><tr><td>\n  2014-15\n  <\/td><td>\n  24748\n  <\/td><\/tr><tr><td>\n  2013-14\n  <\/td><td>\n  1605\n  <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>(Source: <strong>RBI<\/strong><sup><a href=\"https:\/\/rbi.org.in\/Scripts\/AnnualReportPublications.aspx?Id=1249\"><strong>[1]<\/strong><\/a><\/sup>)<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Sectors\nin India that have received the maximum FDI in the last fiscal year<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-table table table-bordered\"><table><tbody><tr><td>\n  <strong>Sector<\/strong>\n  <\/td><td>\n  <strong>FDI <br>\n  (USD million)<\/strong>\n  <\/td><\/tr><tr><td>\n  Communication Services \n  <\/td><td>\n  8809\n  <\/td><\/tr><tr><td>\n  Manufacturing\n  <\/td><td>\n  7066\n  <\/td><\/tr><tr><td>\n  Retail &amp; Whole Trade\n  <\/td><td>\n  4478\n  <\/td><\/tr><tr><td>\n  Financial services\n  <\/td><td>\n  4070\n  <\/td><\/tr><tr><td>\n  Computer services\n  <\/td><td>\n  3173\n  <\/td><\/tr><tr><td>\n  Business services\n  <\/td><td>\n  3005\n  <\/td><\/tr><tr><td>\n  Electricity and other energy\n  generation, distribution &amp; Transmission\n  <\/td><td>\n  1870\n  <\/td><\/tr><tr><td>\n  Construction\n  <\/td><td>\n  1281\n  <\/td><\/tr><tr><td>\n  Transport\n  <\/td><td>\n  1267\n  <\/td><\/tr><tr><td>\n  Miscellaneous services\n  <\/td><td>\n  835\n  <\/td><\/tr><tr><td>\n  Restaurants and Hotels\n  <\/td><td>\n  452\n  <\/td><\/tr><tr><td>\n  Real estate activities\n  <\/td><td>\n  405\n  <\/td><\/tr><tr><td>\n  Education, Research &amp;\n  Development\n  <\/td><td>\n  347\n  <\/td><\/tr><tr><td>\n  Mining\n  <\/td><td>\n  82\n  <\/td><\/tr><tr><td>\n  Trading\n  <\/td><td>\n  0 (had FDI in 2014-15)\n  <\/td><\/tr><tr><td>\n  Others \n  <\/td><td>\n  226\n  <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Country\nwise inflow in India in the last fiscal year<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-table table table-bordered\"><table><tbody><tr><td>\n  <strong>Country<\/strong>\n  <\/td><td>\n  <strong>USD\n  million in 2017-18<\/strong>\n  <\/td><\/tr><tr><td>\n  Mauritius\n  <\/td><td>\n  13415\n  <\/td><\/tr><tr><td>\n  Singapore\n  <\/td><td>\n  9273\n  <\/td><\/tr><tr><td>\n  Netherlands\n  <\/td><td>\n  2677\n  <\/td><\/tr><tr><td>\n  USA\n  <\/td><td>\n  1973\n  <\/td><\/tr><tr><td>\n  Japan\n  <\/td><td>\n  1313\n  <\/td><\/tr><tr><td>\n  Cayman Islands\n  <\/td><td>\n  1140\n  <\/td><\/tr><tr><td>\n  Germany\n  <\/td><td>\n  1095\n  <\/td><\/tr><tr><td>\n  Hong Kong\n  <\/td><td>\n  1044\n  <\/td><\/tr><tr><td>\n  United Kingdom\n  <\/td><td>\n  716\n  <\/td><\/tr><tr><td>\n  Switzerland\n  <\/td><td>\n  506\n  <\/td><\/tr><tr><td>\n  UAE\n  <\/td><td>\n  408\n  <\/td><\/tr><tr><td>\n  France\n  <\/td><td>\n  403\n  <\/td><\/tr><tr><td>\n  China\n  <\/td><td>\n  350\n  <\/td><\/tr><tr><td>\n  Italy\n  <\/td><td>\n  308\n  <\/td><\/tr><tr><td>\n  South Korea\n  <\/td><td>\n  293\n  <\/td><\/tr><tr><td>\n  Cyprus\n  <\/td><td>\n  290\n  <\/td><\/tr><tr><td>\n  Canada\n  <\/td><td>\n  274\n  <\/td><\/tr><tr><td>\n  Others\n  <\/td><td>\n  1889\n  <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is\nFEMA and how is it related to FDI?<\/strong><\/h2>\n\n\n\n<p>FDI or Foreign Direct Investment is regulated by the <strong><a href=\"https:\/\/enterslice.com\/foreign-exchange-regulations\">Foreign Exchange<\/a><\/strong> Management Act, 2000 (FEMA) in India. The FEMA rules and regulations are overseen by the Reserve Bank of India. <\/p>\n\n\n\n<p>Interested foreign investors can\ninvest in an Indian company or business entity either through the Automatic\nRoute in which approval from the RBI or the government is not required or the\nGovernment Route in which case the relevant ministry or government department\nneeds to approve the investment. <\/p>\n\n\n\n<p>The government route is mandatory in\ncase of: &ndash;<\/p>\n\n\n\n<ul><li>11\nnotified sectors &ndash; mining, defense, small\narms, broadcasting, print, civil aviation, satellites, telecom, private\nsecurity agencies, telecom, satellites, trading, financial services that have\nmore than one regulator or there is doubt about the regulator, banking sector,\nand pharmaceuticals.<\/li><li>Bangladeshi\nand Pakistani entities or individuals <\/li><\/ul>\n\n\n\n<p>FDI&rsquo;s are categorized under various\nsub-heads &ndash; Foreign Portfolio Investors (FPI), Foreign Institutional Investors\n(FII), Foreign Venture Capital Investors and Non-Resident Indians. Violations\nrelated to FDI are penalized under FEMA and the apex bank of the country &ndash; RBI,\nas well as the Directorate of Enforcement under the Ministry of Finance has the\npowers to investigate any such violations of rules and regulations.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is the\nput and call option in the context of FDI?<\/strong><\/h2>\n\n\n\n<p>Vide notification no. FEMA\n294\/2013-RB dated 12<sup>th <\/sup>November\n2013 the Foreign Exchange Management Regulations, 2000 (Transfer or Issue of Security by a Person Resident\noutside India) was amended to allow Put and Call options to foreign investors. <\/p>\n\n\n\n<p>A Call option is a criterion by\nvirtue of which an investor can buy shares in an entity at a mutually agreed\nprice while a Put option is defined as a situation\nthat enables the shareholders to sell off their shares. Foreign investors can\nuse the Put option when certain conditions are not met like timely listing or fulfillment of a project by the Indian company.\nBased on the above <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Amendment&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;An &amp;quot;amendment&amp;quot; refers to the formal change or correction of a legal document, often involving additions, variations, or deletions to address irregularities or clarify points in an agreement.(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/amendment\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>amendment<\/a> foreign direct investors could now use these two\noptions in their contractual agreements with an Indian business entity. <\/p>\n\n\n\n<p>This amendment was followed by the\ncircular named Foreign Direct Investment &ndash; Pricing Guidelines for FD\nInstruments with optionality clauses dated 9<sup>th<\/sup> January 2014 vide\nRBI\/2013-14\/436 A.P. (DIR Series) that added that the optionality clause could\nbe permitted to be used with equity shares but on compulsory <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a> had to be\nused with convertible preference shares\/debentures that a foreigner or a\nnon-resident Indian issues under the FDI Scheme. Some key features of the\ncircular were &ndash;<\/p>\n\n\n\n<ol><li>The\ninvestor could sell his securities at the prevailing price or value that is\nsettled on during the time the optionality clause is exercised.<\/li><li>The\nforeign investor can exit without any assured return subject to &ndash;<\/li><li>For\na listed company, the investor sells at the existing <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a> price at a\nrecognized stock exchange.<\/li><li>For\nthe unlisted company, the investor will\nbe able to exit at a price that is not higher that arrived on basis of Return\non Equity (RoE) as per the last audited balance sheet. RoE here means Profit\nafter Tax\/Net Worth where Net Worth is inclusive of free reserves and paid-up\ncapital.<\/li><li>The\nprice in case of Compulsorily Convertible Debentures (CCDs) and Compulsorily\nConvertible Preference Shares (CCPs) will be worked out as per pricing\nmethodologies that are internationally\naccepted and needs to be certified by a Chartered Accountant or a SEBI\nregistered Merchant Banker. In this case, the investor has no guarantee of any\nassured exit price when he makes an investment and the price applicable will be\nfinally decided at the time of exit.<\/li><li>The\noptionality clause is subject to certain conditions like &ndash;<\/li><\/ol>\n\n\n\n<p>Minimum lock-in period of 1 year or\nas prescribed by FDI regulations, whichever is higher. The start of the lock-in\nperiod will be effective from the date such shares or convertible debentures\nare issued or as per prescribed FDI regulations. It is essential to note here\nthat certain sectors have intrinsically higher lock-in periods like the Defence\nwhich has a mandatory period of 3 years.<\/p>\n\n\n\n<p>The above rules need to be mandatorily followed while drawing up contracts for the contracts to be considered compliant with FDI rules and regulations.<\/p>\n\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/enterslice.com\/learning\/amendments-in-fdi-policies-of-e-commerce-business\/\">How Government&rsquo;s new FDI rules can affect E-commerce retailers and business<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What does\nall this mean in terms of enforcement of options under FEMA?<\/strong><\/h2>\n\n\n\n<p>Protected exit clauses under FEMA\nhave been demanded by foreign investors for quite some time now &ndash; something\nthat was on hold for a long time. The industry overall has listed a few distinct advantages of the circulars passed\nby RBI &ndash; <\/p>\n\n\n\n<ul><li>Thanks\nto the clarity provided vide the circulars, the foreign direct investment in\nthe private sector is expected to go up substantially.<\/li><li>It\nhas also helped remove ambiguities about the exit prices.<\/li><li>Also\nbecause of the stringent and tight rules debt will not be brought as equity. <\/li><\/ul>\n\n\n\n<p>Though the above changes and\namendments made by RBI have been welcomed\nby foreign investors but the clause of &lsquo;no assured return&rsquo; that has also been\ninterpreted as stringent valuation restrictions is considered disadvantageous\nfor new FDI projects and ventures. <\/p>\n\n\n\n<p>The enforceability of these options\nalso has limitations especially in case of the exit clause mentioned for\nunlisted companies. Here the investors are still not able to take advantage of\nbusinesses especially new ones that have just been set up &ndash; ones that have good\nfuture potential but are still in their gestation period. <\/p>\n\n\n\n<p>When exiting such ventures, the\nforeign investor who had invested at the market price will get to exit only at\nthe book value rather the price is\ncalculated using a method that takes into account potential cash flows in the\nfuture &ndash; this has acted as a detrimental factor for foreigners to put in their\nmoney into new projects of unlisted companies.<\/p>\n\n\n\n<p>Visit <a href=\"https:\/\/enterslice.com\/\" target=\"_blank\" rel=\"noopener noreferrer\">Enterslice<\/a>, a leading Management Company to know more about FEMA and protection of exit clauses for foreign investors. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is the worth of FDI to a country like India? Foreign Direct Investment (FDI) is very crucial in the fortification and strengthening of an economy. In the context of the Indian Economy, Foreign Direct Investment has helped develop key sectors in India like infrastructure. It has brought in newer technologies to the Indian soil; [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":14586,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1442],"tags":[2475],"acf":{"service_id":"112"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Protection of Exit Clauses for Foreign Investors under FEMA\ufeff: Enterslice<\/title>\n<meta name=\"description\" content=\"Interested foreign investors can invest in an Indian company or business entity either through the Automatic Route in which approval.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/foreign-investors-under-fema\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Protection of Exit Clauses for Foreign Investors under FEMA\ufeff: Enterslice\" \/>\n<meta property=\"og:description\" content=\"Interested foreign investors can invest in an Indian company or business entity either through the Automatic Route in which approval.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/foreign-investors-under-fema\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:author\" content=\"enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2019-03-11T09:41:25+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-02-08T11:25:17+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Foreign-Investors.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"700\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Narendra Kumar","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/04\/nk-1.jpg","authorDescription":"Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.","postViews":545,"readingTime":5,"nextPost":{"id":14598,"slug":"significance-of-bis-certification"},"prevPost":{"id":14567,"slug":"section-145-of-the-income-tax-act"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Foreign-Investors.jpg","postTerms":"FEMA","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/14580"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=14580"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/14580\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/14586"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=14580"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=14580"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=14580"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}