FOREIGN EXCHANGE AND ITS RISK MANAGEMENT: NISHI KOTHARI

 

Introduction.

The Foreign Exchange Management Act, is an official act encapsulating the consolidation and amendment of laws relating to the regulation of foreign exchange in India. The main objectivity of this encompassment is to enunciate the conceptualities integrated within trade structuration’s, namely – External trade and payments, and promoting orderly development and maintenance of foreign exchange market in India. The process of identifying, assessing and controlling various organisation capital and earnings is denoted by the concept of risk management. These risks could be sourced from various mediums – legal liabilities, management conceptualities and financial uncertainties. This article proposes to extrapolate aforementioned conceptualities and bring about demarcations of juridical proponents encapsulating the same.

Regulatory Mechanism

A notification dated 17th October, 2019 extrapolated by the Ministry of Finance purviewed the issuance of Foreign Exchange Management (Non – Debt Instrument) Rules, 2019. The same replacing the Foreign Exchange Management (Issue or Transfer of Securities by Non-residential Indians) Regulations, 2017. The same shall be referred to as Foreign Exchange Management Rules, 20R hereinafter, and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulation, 2018. Changes have been made by these rules to bring about investor friendly conceptualities and a smooth investment experience. An important change to welcome – Valuation of instruments is to be only undertaken during the time of issuance. Such valuation cannot be done at the time of conversion. The same reduces downside risks of equities due to dual valuation, which the investor would otherwise have to face. [[1]]

Foreign Exchange Management Rules, 20R postulated the requirement of an affirmative vote by atleast Seventy-Five percent of its shareholders. The same being referred to as the ‘Special Resolution.’ This resolution seeks to facilitate an increasement of total investing capacity of Indian Companies for acceptance of foreign portfolio investments, being beyond 24% (Twenty – Four percent), the same to be up to the applicable sectoral caps. The passing of the special resolution for acceptance of foreign portfolio investment and automatically enhancing quantum investments, that primarily may be accepted by Indian companies from foreign portfolio investors is removed by these new updated rules. The dominance of these rules will be applicable from the 1^st of April, 2020 as per the sectoral caps and sectors laid down under them. The removal of this special resolution shall enunciate the creation of more opportunities of foreign portfolio investors for investment purposes in Indian companies, with reduced regulatory burden on Indian companies.[[2]]

Conceptualities

Foreign Exchange Management Rules also extrapolate the provision of investment consultation – predominantly being less than 10%, of the post issue paid up equity capital, being enunciated on a fully diluted basis, of a listed Indian company – (FPI cap). This company, being a foreign portfolio investment. Investment in the paid up equity capital on a fully diluted basis of an Indian company, in excess of the FPI cap – would be foreign direct investment. The Foreign Exchange Management Rules, 20R inculcate the provision of foreign direct portfolio being deduced as foreign direct investment. A similar position is held by rules, importantly there is now a window of 5(five) foreign trading days, for the purposes of divestment of shareholding, given to foreign portfolio investors, encompassing an excess of the FPI cap. The same initiates flexibility to the foreign portfolio investors – leading to divest the investment – an excess of the FPI cap, to avoid any changes in the nature of investment. [[3]]

Foreign venture capital investment, with the progression of times, has also seen quite a few favourable changes after the inception of these rules. Foreign venture capital investors have now more investment options, so as to help them start investment in start-ups engaged in various sectors, and also to adhere to the specificities of sector conditions where were previously not existent. [[4]]

Investment vehicles can be denoted by the demarcation of Mutual Funds having more than 50% share in equity investments – guarded by the Security Board of Exchange India. Foreign investors are provided with another investment vehicle via which additional investments can be made. These rules also extrapolate the importance of hybrid principalities – hybrid instruments, giving additional investment options to foreign investors. An importance nuance of facilitating demarcation of such instrument lies in the fact that now due to such regulations, an improved definition is available to create a stark demarcation line between debt and non-debt instruments. Non debt Instruments, by such legislations, encapsulate contribution to trusts within its structuration. An importance nuance that still needs to be demarcated – clarification of what kind of impacts these rules would be having on foreign investors. Importantly, due enunciation is given to the fact that only Indian companies can undertake due B2B e-commerce activities. Hence, a foreign company cannot undertake B2B e-commerce activities.[[5]]

Conclusion

Last but most importantly, the aforementioned encompassment is enunciated as a “rule” and not a “regulation.” Due extrapolations shall hence lead to the following conceptuality – a contradiction circumscribing interpretation of these rules with other regulations shall mainly lead to the prevailment of these rules over other regulations. Further clarifications to be given by the government. These rules welcome change to foreign investors and risk managers.[[6]]

 

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[1] Schedule 2 1 (1), proviso, FEMA 20R.

[2] Schedule 2 (1) (i) of FEMA 20R read with Schedule II (1) (a) of Rules.

[3] Section 2 (xvii) and 2 (xix) of FEMA 20R. Section 2 (r) and 2 (t) of the Rules.

[4] Schedule VII 1. (iii) of the Rules, read in comparison with Schedule 1 (1) (b) of FEMA 20R.

[5] Section 2 (f) and Section 2 (ai) of the Rules.

[6] Schedule 1, 15.2.3 of NDI Rules. (Previous position under FEMA 20R- R 15.2.3 (b) of B. Sector Specific policy for total foreign investment)