Regstreet Law Advisors

Foreign Exchange Management

1. Ease of Doing Business: RBI Liberalizes Automatic FDI Norms for Financial Services

In order to relax FDI norms for financial services activities (“Activities”) regulated by Financial Sector Regulators (“Regulator”), RBI vide its notification dated September 09, 2016 (“the Notification”) has made certain amendments to FEMA (TISPRO) Regulations, 2000. Vide the Notification, RBI has increased the FDI limit under automatic route for Activities regulated by the Regulators such as SEBI, PFRDA, RBI and IRDA to 100%. However, foreign investment made in these Activities is subject to certain conditions such as minimum capitalization requirement prescribed by the concerned Regulator.

Exemption from Government Approval will be available to investments made in these activities only when the entire financial services activity is regulated by one of the Regulators. In cases where only a part of Activities is regulated by a Regulator, then foreign investments made into such Activities will have to seek Government Approval. In case any of these Activities are specifically regulated by an Act, then the foreign investment limits will be governed according to that Act, if prescribed. However, provisions of downstream investments made by entities engaged in these Activities will remain unchanged.

These amendments have provided a big relief and will aid in promoting investments made by foreign investors engaged in financial services activities such as portfolio management services, asset management, investment advisory, NBFC activities, broking etc. These amendments have also provided clarity on minimum capitalization requirements required to be adhered, which will help in business structuring and analyzing viability of their investments.

Taking it further, RBI has allowed 49% foreign investment under automatic route pension sector by FEMA (Transfer or Issue of Security by a Person Resident outside India) (Sixteenth Amendment) Regulations, 2016 w.e.f. 04.11.2016.

2. RBI to Provide Hedging Facility for Indian Subsidiaries of Non-Resident Companies

On November 4, 2016, RBI vide a Press Release provided draft guidelines, to provide hedging facility to Indian subsidiaries of Non- Resident Companies. These draft guidelines aim to provide greater flexibility for hedging the currency risk arising out of current account transactions of Indian subsidiaries of Multi-National Companies by the parent or any non-resident group entity. The draft guidelines provides for certain terms and conditions for availing such facility, which includes, inter-alia:

  • The parent entity has to be incorporated in a country that is a member of the Financial Action Task Force,
  • The transactions under this facility will be covered under a multiple party agreement involving the Indian subsidiary, the non-resident entity and the Indian Authorised Dealer Category – I bank and,
  • The profit/ loss of the hedging transactions shall be reflected in the books of accounts of the Indian subsidiary which, in turn, shall be included in the multiple party agreement.
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