Issuance of Partly Paid Units to Persons Resident Outside India by Investment Vehicles under Foreign Exchange Management (Non-debt Instruments) Rules, 2019
The Reserve Bank of India (RBI) has issued a significant circular addressing the issuance of partly paid units to persons resident outside India by investment vehicles. This development is framed within the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, originally notified by the Central Government on October 17, 2019, and recently amended on March 14, 2024, through the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2024 (S.O. 1361(E)).
Background and Context
The amended rules now explicitly enable the issuance of partly paid units to persons resident outside India by investment vehicles such as Alternative Investment Funds (AIFs). This move is anticipated to enhance the attractiveness of Indian investment vehicles to foreign investors, providing them with more flexible investment options.
Regularisation of Past Issuances
An essential aspect of the circular is the regularisation of partly paid units issued by AIFs to non-residents before the amendment came into effect. To streamline this process, the RBI has decided to regularise these past issuances through the compounding mechanism under the Foreign Exchange Management Act (FEMA), 1999. Compounding refers to the process of voluntarily admitting to a contravention, seeking redressal, and avoiding litigation.
Administrative Actions for AD Category-I Banks
Authorised Dealer (AD) Category-I banks play a crucial role in this process. Before approaching the Reserve Bank for compounding, these banks must ensure that necessary administrative actions are completed. This includes:
- Reporting Issuances: All issuances of partly paid units by AIFs to persons resident outside India must be reported to the RBI through the Foreign Investment Reporting and Management System (FIRMS) Portal.
- Issuing Conditional Acknowledgements: AD Category-I banks must issue conditional acknowledgements for such reporting, confirming that the necessary documentation and compliance measures have been met.
These steps are vital to maintain the integrity and transparency of the investment process, ensuring that all foreign investments are properly documented and regulated.
Communication and Compliance
The RBI has directed AD Category-I banks to disseminate the contents of this circular to their customers and concerned constituents. This ensures that all stakeholders are aware of the new regulations and the procedures to be followed.
Legal Framework
The directions contained in the circular are issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999). These directions are issued without prejudice to any permissions or approvals that may be required under other applicable laws.
Conclusion
The amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, and the subsequent circular from the RBI mark a significant step in facilitating foreign investment in India. By enabling the issuance of partly paid units to non-residents and regularising past issuances, the RBI is paving the way for a more robust and flexible investment environment. This initiative not only boosts the confidence of foreign investors but also strengthens the regulatory framework governing foreign investments in the country.
