Under the Foreign Exchange Management Act, 1999, the Reserve Bank of India (the “RBI”) issues directions to authorized dealers (“AP Dir Circulars”) from time to time. Further, it issues subject specific master circulars in July each year that consolidate all AP Dir Circulars issued by it since last July on the subject. This article covers the significant changes to the Master Circulars governing Foreign Investment in India and Direct Investment in Overseas Companies issued by the RBI on 2 July 2012.

Master Circular on Foreign Investment in India

  1. Transfer of shares – Certain transfers of shares between resident and non-residents (and vice versa) have been permitted without the requirement of obtaining prior RBI approval even if such transfers do not meet the pricing norms specified by the RBI; provided, these transfers meet certain other conditions including pricing norms specified by the Securities and Exchange Board of India (the “SEBI”). Certain other relaxations have also been included in relation to transfer of shares of a non-banking finance company.
  2. Investment by foreign venture capital investors – The circular also allows SEBI registered foreign venture capital investors to acquire shares from third parties as opposed to acquiring them only through an IPO or a private placement.
  3. Shares against consideration in kind – Companies are permitted to issue shares against import of machinery with prior Government approval. However, the circular clarifies that this route will not be available where the imported machinery is second hand machinery.
  4. Qualified Foreign Investors – The circular recognizes a new class of foreign investors called “qualified foreign investors” or “QFIs”. The RBI has prescribed various norms governing their investment in India.
  5. Changes to Sectoral Conditions – The circular incorporates the various changes made to the sectoral conditions since last year. For instance, it mentions 100% investment being permissible in single brand retail, and it also clarifies that investment in brownfield pharma companies requires prior Government approval.
  6. Increase in portfolio investment limits – Indian companies are permitted a total of 26% investment by foreign institutional investors and 10% from non-resident Indians under the portfolio investment scheme. These limits can be increased by a company to certain specified limits and companies are required to intimate the RBI of such an increase. The circular specifies that this intimation should be accompanied by a certificate from a Company Secretary certifying compliance with all related norms. 

Master Circular on Overseas Investment

Earlier, in order for a foreign company to issue stock option plans to employees of an Indian company, it was required that the foreign company should directly to indirectly hold at least 51% shares in the relevant Indian company. This requirement has been done away with.

Sameer Sah[1]


[1] Senior Associate, Khaitan & Co, Mumbai.  The views expressed in this article are those of the author and may not necessarily reflect the views of the firm.