The RBI amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (“Transfer Regulations”) by issuing the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Eleventh Amendment) Regulations, 2015, which was notified on November 16, 2015 (“Notification”).

The Notification amends the Transfer Regulations, allowing foreign investment through investment vehicles, subject to certain terms and conditions. An “investment vehicle” is defined to be an entity that is registered and regulated under relevant regulations framed by the Securities Exchange Board of India (“SEBI”) or any other designated authority, through which a person resident outside India (“Non-Resident”), including Registered Foreign Portfolio Investor (“RFPI”) or a NonResident Indian (“NRI”) will be permitted to make investments in inter alia Real Estate Investment Trusts (“REIT”) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment 

Trusts (“InvIT”) governed by the SEBI (InvITs) Regulations, 2014 and Alternative Investment Funds (“AIF”) governed by the SEBI (AIFs) Regulations, 2012 and a “unit” in respect of an investment vehicle would mean the beneficial interest of an investor, in the investment vehicle and would include shares or partnership interests.

A Non-Resident, RFPI or an NRI will be permitted to acquire, purchase, hold, sell or transfer units of an investment vehicle, in the manner and conditions specified in the Transfer Regulations, however the lock-in period made applicable to shares or debentures of an Indian company containing optionality clause(s) will not be made applicable to investment vehicles. Further a NonResident holding units of an investment vehicle will be permitted to pledge the units for securing credit facilities that may be extended to the NonResident.

Some of the salient terms and conditions are described below:

  1. Payment for units can be made by inward remittances through normal banking channels including by debit to a Non-Resident Rupee Account/ Foreign Currency Non-Resident Account;
  2. Downstream investments by an investment vehicle will be regarded as a foreign investment, where neither the sponsor, the manager nor the investment manager is an Indian “owned and controlled” as defined in the Transfer Regulations. Further, such investments will have to conform to applicable sectoral caps/conditions/restrictions, if any. In case of sponsor, manager or investment manager which are organised in a form other than companies, SEBI shall have the power to determine whether ownership and control is with a foreign entity. However, a LLP cannot be a sponsor, manager or investment manager since its ownership and control cannot be determined;
  3. Downstream investments in a LLP by an investment vehicle will have to conform to the relevant provisions of the Transfer Regulations for the acquisition/ transfer of capital contribution or profit share of LLPs;
  4. Category III AIFs with foreign investments will only be permitted to make portfolio investment in securities/ instruments in which Registered Foreign Portfolio Investor(s) are permitted.

The Notification will seek to bring about improved flows of foreign investments in India with the investment vehicles now being given a broader connotation. Further, permitting Non-Residents to pledge units held by them for securing credit facilities should be a welcomed move for the prospective investors.