Govt. reviews the FDI policy | Permits FDI in LIC IPO to attract foreign investments

1. Introduction

The Government has reviewed the existing Foreign Direct Investment (FDI) policy. Various amendments have been made under the extant FDI policy. The major amendment includes permitting the foreign investment in the Life Insurance Corporation of India (LIC). The Government has capped 20% FDI limit in LIC under the automatic route. The existing policy allows 74 % foreign investment in an Indian insurance company, LIC being a corporation incorporated under the special act of the parliament was not covered there. Hence the specific provisions are added in this regard. This will attract foreign investment in the proposed IPO.

Other modifications include modification in the definition of Indian Company, conversion period of convertible notes are extended from 5 years to 10 years, exclusion of few businesses from real estate business, the introduction of form ESOP reporting etc. All these changes are made with an objective to bring more consistency and clarity in the existing FDI policy.

2. Modification introduced in the extant FDI policy

2.1 FDI allowed in LIC

LIC IPO is the talk of the town. This will be one of the biggest IPO of India. Everyone is keeping an eye on it for a long time. The Government in continuation with its constant efforts to make India an attractive investment destination for foreign investors comes out with the modification in the extant FDI policy allowing the foreign direct investment (FDI) in the Life Insurance Corporation of India (LIC). The government has allowed 20% FDI in the LIC and that is allowed under the automatic route.

The existing FDI policy did not prescribe any specific provision w.r.t foreign investment in LIC. The existing policy permits the FDI in insurance companies and intermediaries or insurance intermediaries in the insurance sector. LIC being a corporation incorporated under the special act of Parliament was not covered there. Hence the specific provisions are added in this regard. Further the specific provisions are added for what additional conditions are required to be complied by LIC for inviting the foreign investment. The inclusion of the LIC in FDI policy will ensure that the investors do not face any hurdles while subscribing for the public offer. This is a great move to attract foreign investment in LIC’s upcoming IPO.

2.2. Inclusion of the Body Corporates in the FDI policy

Under the extant FDI Policy an Indian Company means a company incorporated under the applicable Companies Act. The existing policy did not cover the body corporates.

The govt has modified the definition of the Indian Company. Now under the modified definition body corporates established or constituted by or under any central or state act will also be covered. This will enhance the scope of the FDI policy now body corporates would be able to invite foreign investment and will also be governed by the FDI policy.

The govt also clarified that the Indian Company does not include the society, trust or any entity, which is excluded as an eligible investee entity as per the FDI Policy.

2.3 A startup can issue the convertible note for a longer period

Under the extant FDI Policy, a start-up can acknowledge receipt of money by way of convertible note which is convertible into such number of equity shares of such startup company, within a period not exceeding 5 years from the date of issue of the convertible note.

Under the modified policy the govt has extended the conversion period from 5 years to 10 years meaning thereby now a start-up can issue the convertible note maximum for a period of 10 years in place of 5 years as allowed earlier. This will help the start up companies to raise money by way of convertible note without diluting their equity for a longer period.

2.4 Introduction of new para w.r.t “Share-Based Employee Benefit” and “Subsidiary”

The modified policy specifically defines the two terms namely:

(a) Share-Based Employee Benefit- means any issue of capital instrument to employees, pursuant to share based employee benefits scheme formulated by a body corporate established or constituted by or under any central or state act.

(b) Subsidiary – It shall have the same meaning as is assigned to it under the companies Act, 2013 as amended from time to time.

Earlier, these terms were not specifically provided. The specific mention of these terms will lead to more clarity now.

2.5 Specific exclusion of Real Estate Investment Trusts (REITs) from real estate business.

The modified FDI Policy re defined the term”Real Estate Business”. The modified policy provides that the Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014 will not be included under the scope of the real estate business. Earlier no specific exclusion was provided.

2.6 Filing of form “ ESOP Reporting” with the Foreign Exchange Department

As per the FDI policy the Indian company issuing ESOP/ sweat equity shares shall furnish to the Regional Office concerned of the Reserve Bank of India under whose jurisdiction the registered office of the company operates, a return as per the Form-ESOP within 30 days from the date of issue of employees’ stock option or sweat equity shares.

The modified policy provides that the form “ESOP Reporting” is to be filed with the Foreign Exchange Department now in place of filing of form ESOP with the concerned Regional office as required earlier.

3.Conclusion

The modified policy as introduced by the government is a great step it will attract the more and more foreign investors to invest in India. The specific inclusion of the boday corporate in the definition of the Company will widen its scope and will lead to enhanced foreign funding. Further permitting the foreign investment in the LIC will attract the foreign investors to subscriber for the upcoming LIC IPO, a timely action taken by the government. The new policy re defined the few terms in order to align the same with the Companies Act and other allied laws. Modified policy provides a clearer picture of the FDI policy norms.