As per Foreign Exchange Management Act, 1999 (FEMA), the onus of compliance with the various foreign investment limits rests on the Indian company. In order to facilitate the listed Indian companies to ensure compliance with the various foreign investment limits, Securities and Exchange Board of India (SEBI) in consultation with Reserve Bank of India (RBI) has decided to put in place the framework to help companies to ensure compliance with various foreign investment limits.
As per the SEBI circular issued, the guidelines for monitoring foreign investment limits in listed Indian companies shall be effective from 1st May 2018.
The monitoring of the foreign investment limits shall be based on the paid-up equity capital of the company on a fully diluted basis which means the total number of shares that would be outstanding if all possible sources of conversion are exercised, to ensure that all foreign investments are in compliance with the foreign investment limit.
The new guidelines for monitoring the foreign investment limits in listed Indian companies shall be implemented and housed at the depositories- National Securities Depository Limited (NSDL) and Central Depository Securities Limited (CDSL). NSDL and CDSL are both Government registered depositories which are used to hold various securities like stocks, shares, money, property etc. in an electronic form. NSDL works for National Stock Exchange (NSE), whereas CDSL works for Bombay Stock Exchange (BSE).
A company will have to appoint any one depository as its Designated Depository for monitoring the foreign investment limits.
The stock exchanges [BSE, NSE and Metropolitan Stock Exchange of India Ltd. (MSEI)] shall provide the data on the paid-up equity capital of an Indian company to its Designated Depository.
The depositories need to provide an interface wherein a firm will have to give information including Company Identification Number (CIN), applicable sector, applicable sectoral cap, permissible aggregate limit for investment by Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs) and other foreign investors, details of shares held by FPIs, NRIs and other foreign investors, on repatriable basis, in demat as well as in physical form, details of indirect foreign investment which are held in both demat and physical form, details of demat accounts of Indian companies making indirect foreign investment in the capital of the company and details of the downstream investment in other Indian companies
In the event of any change in any of the details pertaining to the company, such as increase/decrease of the aggregate FPI/NRI limits or the sectoral cap or a change of the sector of the company, etc. the company shall inform such changes along with the supporting documentation to its Designated Depository.
A red flag shall be activated whenever the foreign investment within 3% or less than 3% of the aggregate FPI/NRI limits or the sectoral cap.
The depositories shall inform the exchanges about the activation of the red flag for the identified scrip. The exchanges shall issue the necessary circulars/public notifications on their respective websites. Once a red flag has been activated for a given scrip, the foreign investors shall take a conscious decision to trade in the shares of the scrip, with a clear understanding that in the event of a breach of the aggregate FPI/NRI limits or the sectoral cap, the foreign investors shall be liable to disinvest the excess holding within five trading days from the date of settlement of the trades and if the FPIs have failed to disinvest within five trading days, then necessary action shall be taken by SEBI against the FPIs.
Thus, the depositories shall issue the necessary circulars and guidelines for collecting data on foreign investment from listed companies. The companies shall provide the necessary data to the depositories latest by 30th April, 2018.