Liberalization of RBI’s Policies

The Reserve Bank of India (RBI) last
week issued a series of circulars liberalizing and streamlining its policies on
various types of equity investments as well as on external commercial
borrowings (ECBs). The key pronouncements are highlighted below:
1.         Foreign Investment in “Other Financial
In the case of non-banking finance
companies (NBFCs), foreign investment is allowed up to 100% under the automatic
route in case of 18 activities that are listed in the schedule to the relevant
RBI regulations. Under Circular
No. 8
issued on October 20, 2016, the RBI has extended this treatment (i.e.
100% foreign investment under the automatic route) to “other financial services”,
which includes activities that are regulated by any financial sector regulator such
as the RBI, the Securities and Exchange Board of India (SEBI), the Insurance
Regulatory and Development Authority (IRDA), and the like. This is subject to
appropriate conditionalities as may be imposed by the relevant regulator. However,
if the activity is either not regulated or its regulatory status is unclear,
then the foreign investment will be allowed only under the Government approval
2.         Investment by a Foreign Venture Capital
Investor (FVCI)
FVCIs are now permitted to make
investments in certain sectors without requiring any approval from the RBI. In
case of unlisted companies, FVCIs can make investments in equity, equity-linked
instruments or debt instruments in specific sectors, which include biotechnology,
IT, nanotechnology, etc. as listed in RBI’s
Circular No. 7
issued on October 20, 2016. However, an FVCI can invest into
a “startup” irrespective of the sector in which such startup is engaged. A “startup”
is defined as a private limited company, registered partnership firm or a
limited liability partnership (LLP) which is not older than five years, and
with an annual turnover not exceeding INR 25 crores in any preceding financial
year, and is working in areas driven by technology or intellectual property as
3.         Review of Sectoral Caps
Pursuant to various changes announced
by the Government of India to conditions specific to various sectors, the RBI
by way of Circular
No. 6
dated October 20, 2016 announced a process of simplification for
foreign direct investment (FDI). Among the key changes are: imposition of a
composite sectoral cap encompassing all types of foreign investment,
prescriptions on total foreign portfolio investment, specifications regarding
ownership and control of entities by Indian citizens, foreign investment in
LLPs, stipulations regarding foreign investment by swap of shares, and so on.
4.         Extension and Conversion of ECBs
Under the ECB guidelines, designated
AD Category-1 banks are allowed to approve requests from borrowers for changes
in repayment schedules on certain conditions, so long as these are made during
the tenure of the ECB (i.e. prior to maturity). However, under Circular
No. 10
dated October 20, 2016, the RBI has allowed designated AD Category-1
banks to approve the extension of matured but unpaid ECBs, subject to certain
conditions. The approval also extends to allowing conversion of “matured-but-unpaid”
ECBs into equity. This will provide greater flexibility to the borrowers and
lenders to structure appropriate arrangements in case of failure of repayment
upon maturity of the ECB.
All of the above measures are intended
to increase the availability of fundraising opportunities for Indian companies
from various types of foreign investors as well as lenders.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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