Investment in unlisted equity shares of indian Company by Foreign Portfolio Investor (FPI)

Facts of the Case:

• IPFII Singapore 4 Pte Ltd. (‘the FPI’) has invested in non-convertible debentures (NCDs) issued by an Indian company (‘the Company’).
• The equity shares of the Company are not listed nor are to be listed on any Indian stock exchange. 100% of the equity shares of the Company is held by 2 foreign companies (99.99% with one shareholder and 0.01% with the other shareholder) under the Foreign Direct Investment (FDI) route. Both the shareholders are not registered in India as Foreign Portfolio Investors.
• There was a proposal to transfer that 0.01% of the company’s shares belonging to one shareholder to the FPI such that the FPI shall hold NCDs as well as 0.01% equity shareholding of the company, post transfer.

Contentions:

The FPI: According to the FPI, while Regulation 20(1)(a) of FPI Regulations, specifies that a FPI can only invest in shares of a body corporate, listed or to be listed, Regulation 20(8) permits FPI to invest in Indian securities as person resident outside India (PROI) in accordance with Foreign Exchange Management (Transfer or Issue of Securities by a person resident outside India) Regulations, 2017 (FEMA 20R) where FEMA 20R permits a PROI to invest in unlisted shares of an Indian company under the FDI route. Consequently, the FPI being a PROI can also invest in unlisted equity shares of the Company.

SEBI: However, SEBI contends that in addition to the FPI Regulations, which state that a FPI can invest in shares, debentures and warrants issued by a body corporate, listed or to be listed on a recognized Indian stock exchange, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (which now supersedes FEMA 20R) specifically states under Schedule II, clause 1(a) that an FPI may purchase or sell equity instruments of an Indian company, listed or to be listed on a recognized Indian stock exchange. Accordingly, the FPI’s interpretation of Regulation 20(8) stands incorrect.

Conclusion:

In pursuance of the FPI Regulations given by SEBI and the relevant FEMA rules and regulations, it has been stated that a foreign investment can be made via FDI or FPI route. Where a PROI is registered as a FPI in India, such investment shall be treated as ‘Foreign Portfolio Investment’ and thereby shall have to follow specific regulations given for foreign portfolio investments. Therefore, the FPI can invest only in listed or to be listed equity instruments.

With regards to the investment in NCDs, the RBI master Direction states that FPIs are permitted to invest in unlisted NCDs issued by an Indian company subject to minimum residual maturity of 3 years and end use restriction on investment in real estate business, capital market and purchase of land. Therefore, the FPI’s investment in NCDs of the Company stays valid.

Source: SEBI/HO/IMD/FIIC/OW/P/2020/3302/1 dated 24th January, 2020