On March 14, 2022 the Department for Promotion of Industry and Internal Trade (“DPIIT”) reviewed the Consolidated FDI Policy Circular of 2020 (“FDI Policy”) for the purpose of allowing foreign investment in the Life Insurance Corporation of India (“LIC”), along with providing clarity and consistency in other sections of the FDI Policy including those provisions relating to real estate businesses. As per the March 14 press note (“Press Note”), the DPIIT amendments to the FDI Policy shall take effect from the date of the requisite FEMA notification to that effect.
First, the Press Note provides for an increase in the time period earlier granted for the repayment or conversion of a convertible note. A convertible note is an instrument issued by a start-up company that provides the holder with an acknowledgement of the receipt of a sum of money as debt, but which can be repayable to the holder of the instrument at its option, or which may be converted into equity shares of the start-up within a certain amount of time. This time period has now been increased to a period of 10 years from the date of issue of the convertible note, from a period of five years as in the FDI Policy, providing the holder of the instrument with a larger window of time to make a decision as to the manner of redemption of the instrument.
Second, the Press Note amends and aligns the FDI Policy with respect to the provisions relating to real estate business by amending the definition of ‘real estate business’ and aligning the provisions in the FDI Policy relating to the same. The definition of ‘real estate business’ in the FDI Policy was provided for in the negative, qualifying it by its exclusions rather than providing clarity on what it included. The Press Note has amended the definition by adding the business of, “dealing in land and immovable property with a view to earning profit therefrom,” to the definition. The qualifiers present in the FDI Policy have been included in the new definition, namely the “development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships and Real Estate Investment Trusts registered and regulated under the SEBI (REITs) Regulations, 2014,” continue as exceptions to the rule. The Press Note further clarifies that earning any rent or income from the lease of property, not amounting to transfer, does not constitute ‘real estate business.’ The next amendment to the FDI Policy was made to note (i) of paragraph 5.2.10.2 of the FDI Policy, whereby it has now been aligned with the new definition of ‘real estate business’ provided for in the Press Note.
Third, the Press Note introduces the concept of issuing ‘share based employee benefits’ by a company wherein foreign investment has been made under the automatic route. However, it clarifies, the issuance of such benefits shall require the prior approval of the Government of India. Further, all ‘share based employee benefits’ issued under applicable law or regulations may be granted to any employee or a director who is a citizen of Bangladesh or Pakistan only upon the receipt of prior approval from the Government of India. While the earlier iteration of the FDI Policy only provided for the issue of employee stock option schemes and sweat equity shares, the addition of this new class of benefits may result in a number of benefits granted to the employees of such companies.
Fourth, the Press Note makes changes to the existing norms relating to the acquisition of shares under the scheme of merger/demerger/amalgamation. The Press Note provides that a transferee company or new company, as the case may be, formed after, “a scheme of compromise, arrangement, merger or amalgamation of two or more Indian companies, a reconstruction by way of demerger or otherwise of an Indian company…has been approved by the National Company Law Tribunal or other authority,” may issue capital instruments to the existing shareholders of the transferor company resident outside India, subject to certain conditions. This amendment marks a departure from the existing FDI Policy that only provided for the issue of shares by the transferee company or new company.
Lastly, the Press Note provides for a number of changes to the FDI Policy for investment in the LIC, ahead of its IPO whereby the Government of India seeks to dilute its stake in the corporation. For example, a new paragraph is to be added to the FDI Policy, that provides for up to 20% FDI in the LIC under the automatic route. Further, the Press Note provides for a bifurcation in the FDI Policy, for ‘Other Conditions’ applicable to: (i) Indian insurance companies and intermediaries or insurance intermediaries; and (ii) the LIC. Further, all foreign investment in the LIC shall now be required to comply with the applicable provisions of the Life Insurance Corporation Act, 1956 (“LIC Act”), and any increase in foreign investment in an Indian insurance company must be compliant with the pricing guidelines issued by the RBI under the applicable FEMA Regulations.
These amendments were required in light of the proposed LIC IPO, given that the FDI Policy only permitted FDI up to 74% of the share capital of an Indian insurance company. However, since the LIC is a statutory corporation established under the LIC Act, the FDI permitted earlier would not have applied to the LIC. Thus, the abovementioned amendments provided by the Press Note certainly provide more clarity and consistency in the FDI Policy, enabling ease of comprehension and answering questions long since posed.
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