Key Changes under the FEMA 20, 2017 Regulations

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant.

[Kunal Kumar]

The author is a fourth-year student at National Law University, Jodhpur.


The Reserve Bank of India (“RBI”) vide notification No. FEMA 20(R)/ 2017-RB dated November 7, 2017 issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (“FEMA 20”), which supersedes previous regulations namely the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2000 (“FEMA 20/2000”), and the Foreign Exchange Management (Investments in Firms or Proprietary concern in India) Regulations, 2000 (“FEMA 24”). An attempt to analyse the key changes under the newly notified Regulations has been made through this article. The Department of Industrial Policy and Promotion announced the Consolidated FDI Policy 2017 (“FDI Policy”) on August 28, 2017. Of course, the changes under the FDI Policy have to be reflected under the FEMA 20, this essay will also discuss such changes when required.

Key Changes Introduced

Meaning of Foreign Investment

The FEMA 20 provides that foreign investment means any investment made by a person resident outside India on a repatriable basis, thus making it clear that investment on non-repatriable basis is at par with domestic investment.


The FDI Policy 2017 allows startup[1] companies to:

-issue convertible notes to residents outside India,[2] Convertible notes have been defined as instruments evidencing receipt of money as debt, which is repayable at the option of the holder, or which is convertible into equity shares;[3] and

-issue equity or equity linked instruments or debt instruments to Foreign Venture Capital Investor (“FVCI”) against receipts of foreign remittance.[4]

Note: An entity shall be considered as a ‘startup’ if[5]

(a) it has not crossed five years from the date of its incorporation/registration;

(b) its turnover for any of the financial years has not exceeded Rs. 25 crore, and

(c) it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

Remittance against Pre-incorporation Expenses

As per the 2016 FDI Policy, equity shares could be issued against pre-incorporation expenses, under the government route, subject to compliance with the conditions thereunder.[6] The 2017 FDI Policy has changed this requirement which is reflected under the FEMA 20. Therefore, subsidiaries in India wholly owned by non-resident entities, operating in a sector where 100% foreign investment is allowed in the automatic route and there are no FDI linked conditionalities, may issue equity shares, preference shares, convertible debentures or warrants against pre‑incorporation/ pre-operative expenses up to a limit of five percent of its authorized capital or USD 500,000 whichever is less, subject to conditions prescribed.[7]

Note: However, this cannot be said to be a completely new provision under the FEMA 20 as this was introduced in the existing FEMA 20 through the eleventh amendment dated 24th October, 2017.

ESOP to Directors

FEMA 20 expressly allows an Indian company to issue employees’ stock option to its directors or directors of its holding company/ joint venture/ wholly owned overseas subsidiary/ subsidiaries who are resident outside India. Such company shall have to submit Form-ESOP to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of the company operates, within 30 days from the date of issue of employees’ stock option.[8]

Reclassification of FPI Holding

The total investment made by a SEBI registered foreign portfolio investor (FPI) in a listed company will be re-classified as FDI where it’s holding exceeds 10% of the paid-up capital or 10% of the paid-up value in respect of each series of instruments. Such a reclassification is required to be reported by way of Form FC-GPR.[9]

Transfers by NRIs

Transfer of capital instruments by a Non-Resident Indian (NRI) to a non-resident no longer requires RBI approval.[10] Earlier, as per regulation 9, FEMA 20/2000, a NRI was eligible to transfer the capital instruments only to a NRI or overseas corporate body, and if such capital instruments were to be transferred to a non resident, prior permission of RBI was mandatory as per regulation 10(B) of the FEMA 20/2000.

Onus of Reporting

FEMA 20/2000 laid the onus of submission of the form FC-TRS within the specified time on the transferor / transferee, resident in India.[11] The 2017 Regulations lays onus on the resident transferor/ transferee or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be.[12] In case of transfer under Regulation 10 (9), the onus of reporting shall be on the resident transferor/ transferee. Also, unlike the previous position, the new FEMA 20 allows for delayed reporting subject to the payment of fees to be decided by the RBI in consultation with the central government.[13] This is a significant change as FEMA 20/2000 did not provide anything on delayed filing, because of which the same would be deemed as contravention and required compounding by the RBI.

Time Limit for Issue of Capital Instruments

The FEMA 20/2000 mandated issuance within 180 days from receipt of inward remittance.[14] However, the Companies Act, 2013 provides for allotment of securities within 60 days of receipt of application money or advance for such securities.[15] FEMA 20 now provides that capital instruments shall be issued to the person resident outside India making such investment within sixty days from the date of receipt of the consideration,[16] aligning the requirement to issue capital instruments with Act, 2013. Further, proviso to para 2 (3) of Schedule 1 to FEMA 20 provides that prior approval of RBI will be required for payment of interest in case of any delay in refund of the amount.


The new Regulations have been enacted to maintain consistency with the related legislations. With the new Regulations coming, it is hoped that the governance of transfer of securities by non-residents will be eased.

[1] Paragraph (“para”) 3.2.6 of the Consolidated FDI Policy 2017.

[2] As per the conditions under para 3.2.6 of the FDI Policy and Regulation 8, FEMA 20.

[3] Regulation 2(vi), FEMA 20.

[4] Regulation 5(7) and Para 1(1)(b) of Schedule 7, FEMA 20.

[5] There are certain other requirements that have to be followed by a startup company as per notification G.S.R. 180(E) dated February 17, 2016 issued by Ministry of Commerce and Industry.

[6] Atul Pandey, et. al, “Key Changes In the Consolidated FDI Policy of 2017”, available at (last accessed January 1, 2018).

[7] Para 1(3), Schedule 1 of the FEMA 20 and para 6(iii) of the FDI Policy.

[8] Regulation 7 read with Regulation 13(5), FEMA 20.

[9] Para 1(2), Schedule 2, FEMA 20.

[10] Regulation 10.2, FEMA 20.

[11] See Para 2(ii), Section V: Reporting Guidelines for Foreign Investment in India, Master Circular on Foreign Investment in India, Master Circular No. 15/2014-15, July 1, 2014, available at (last accessed January 6, 2018).

[12] Regulation 13.1(4), FEMA 20.

[13] Regulation 13.2, FEMA 20.

[14] Proviso to para 8, Schedule 1, FEMA 20/2000.

[15] Section 42 (6), the Companies Act, 2013.

[16] Para 2 (2) Schedule 1, FEMA 20.

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