Extension Needed for FPI Investment, Compliance on Sectoral Cap and Shareholders’ Approval
Vinita Nair  and  Smriti Wadehra 28 April 2020
As per the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (hereinafter referred to as NDI Rules) notified on 17 October 2019 by the ministry of finance (MoF) in supersession of the Foreign Exchange Management (Transfer or Issue of Securities by Persons Resident Outside India) Regulations, 2017 (‘TISPRO’); with effect from 1 April 2020, the aggregate limit of investments by SEBI-registered Foreign Portfolio Investors (FPI) is permissible up to the sectoral cap.
The NDI Rules provided an opportunity to the Indian company to reduce the investment limit to a lower threshold, with the approval of the board of directors and shareholders by way of a special resolution passed before 31 March 2020.
Considering the minimal time of five months provided to Indian companies coupled with the current situation of the pandemic that started impacting the economy from March 2020, it was difficult for companies to convene meetings for approval of lower investment limits.  The fate of earlier approved investment limits is also unclear. In such a situation, there is an urgent need for the ministry to consider granting a suitable extension to enable companies to comply with the requirement.
Sectoral Caps for Foreign Investment
The term ‘sectoral cap’ refers to the maximum amount of investment by way of investment on repatriation basis by residents outside India in capital instruments and/or investment in the capital of a limited liability partnership (LLP). The sectoral caps and other conditionalities are decided by the ministry of commerce and industry. 
Automatic route means that there is no requirement to obtain approval. Government route requires approval of the respective ministry by making an application on foreign investment facilitation portal. Sectors not specified in Schedule I of NDI Rules are under 100% automatic route. A few examples are provided hereunder:
Sectors under Automatic Route
1. Agriculture and animal husbandry (100%)
2. Plantation (100%)
3. Mining of coal and lignite (100%)
4. Manufacturing (100%)
5. Broadcasting carriage services (100%)
Sectors Entirely under Government Route
1. Mining and mineral separation of titanium bearing minerals and ores (100%),
2. Terrestrial broadcasting FM (49%),
3. Uplinking of news & current affairs TV channels (49%),
4. Uploading/ streaming of news and current affairs through digital media (26%),
5. Publication of newspaper, periodicals, Indian editions of foreign magazines dealing with news and current affairs (26%).
Sectors Partly under Automatic and Balance under Government Route:
1. Defence (automatic up to 49%; government route beyond 49%),
2. Air transport services [automatic up to 49% government route beyond 49% (automatic up to 100% for NRI’s and OCI’s)].
Effective Date of Revised Limit
The revised aggregate limits for FPI are applicable from 1 April 2020. Several companies in the past had passed resolutions to increase the aggregate limit for FPI beyond 24% by passing board resolutions and special resolutions of the members, however, all such companies did not increase the limit till the sectoral cap. 
The companies were given time of less than six months to convene a general meeting and pass a resolution to reduce the limit of investment by FPI in aggregate, failing which the limit would automatically be restored at the sectoral cap. The resolutions passed earlier seem to be ineffective from 1 April 2020. 
Companies that Approved Investment Limit
As per the list available on the RBI website, some companies like Power Grid Corporation of India, Dabur India, Titan Company, Havells India, HDFC Bank, and Ultratech Cement had approved investment limits which were over and above the permissible aggregate investment limit of 24% of paid up equity capital or paid up value of the series by way of shareholders’ approval up to, say, 30%, 35%, 40%, 49%, 60% or 74%, but below the sectoral cap.
Some examples are as follows:
1. Power Grid had approved an FPI limit up to 30% of its paid-up capital on 19 December 2018, however, after 1 April 2020 the limit has been automatically changed to 100% (i.e. as per the sectoral cap);
2. Lemon Tree Hotels had approved an FPI limit up to 49% of its paid-up capital on 24 July 2017, however, after 1 April 2020 the limit has been automatically changed to 100% (i.e. as per sectoral cap);
3. HDFC Life Insurance Company had approved an FPI limit up to 49% of its paid-up capital on 25 June 2019. After 1 April 2020 the limit remains the same, as the sectoral cap is limited to 49%;
4. Future Lifestyles Fashions had approved an FPI limit up to 49% of its paid-up capital on 14 June 2018; however, after 1 April 2020 the limit has been automatically changed to 100% (i.e., as per the sectoral cap)
In this regard, there are some companies like Health Care Global Enterprises, Prataap Snacks, and Crompton Greaves Consumer Electricals, which had approved investment limits up to the sectoral caps i.e. 100%.
Role of Depositories
As per the Foreign Exchange Management Act 1999 (FEMA), the onus of compliance with the various foreign investment limits rests on the Indian company. However, these investments are regulated by the Securities Exchange Board of India (SEBI) and RBI as per the FEMA. This power of regulation has further been delegated by SEBI, after consultation with RBI, to the depositories on 5 April 2018. Hence, the depositories are responsible to regularly monitor foreign investment in listed Indian companies.
The depositories regulate Indian companies by updating information under two heads mainly—caution list and breach list. The breach list provides data of companies which have reached the permissible sectoral limit, whereas, the caution list or red flag list provides data of companies which are within or less than 3% of the sectoral cap or aggregate FPI limits. The circular also obligates Indian companies to report changes i.e. increase/decrease of aggregate FPI/NRI limits or sectoral caps or any change in the sector of the company along with relevant documentation of the board and the shareholders’ resolution approving such change and company secretary’s certificate ensuring compliance of FEMA, 1999. This circular was made effective from 1 June, 2018. 
In order to comply with the provisions of the NDI Rules that became effective from 1 April  2020, the depositories are enquiring information from respective companies as to whether any resolution for reducing the limit below the sectoral cap has been passed before 31 March  2020. If yes, then the limit approved by shareholders is taken on record for updating the information. However, if no such resolution is passed, the depositories are updating the foreign investment limits of companies as per their existing sectoral cap as on 1 April 2020.
Need for Extension
As mentioned earlier, the NDI Rules also provided an opportunity to Indian companies to reduce the limit below the sectoral cap before 31 March, 2020.  Given the situation due to the COVID-19 pandemic, it was impossible for the companies to convene meetings for this. Most of the companies had already conducted their AGMs. Hence, observing the current scenario practically, the Indian companies were required to either accept restoration of limits up to the sectoral caps which can be as high as 100% of the paid-up capital of the company or obtain approval by way of special resolution by the shareholders by specifically calling an EGM/postal ballot. In this regard, we also observe that the companies that had approved lower limits of investment for FPIs shall stand ineffective.
The ministry of finance should consider amending NDI Rules to grant a suitable extension in order to enable companies to take up the resolution in the ensuing AGMs. 
(CS Vinita Nair is partner at Vinod Kothari & Co, while Smriti Wadehra works as assistant manager in the corporate law division of the firm.)
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