Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India) Regulations, 2017

The Foreign Exchange Management Act, 1999 (FEMA) governs foreign exchange transactions in India. In 2017, the Reserve Bank of India (RBI) introduced a specific set of rules the Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India) Regulations, 2017 to streamline how overseas persons can issue or transfer securities that are linked to Indian assets. This page provides a concise yet comprehensive overview of these Regulations, their scope, key provisions, procedural requirements, and practical implications for issuers, investors and advisors.

1. Purpose and Rationale

Before 2017, the process for a nonresident to issue Indianlinked securities involved multiple authorisations and often ambiguous interpretations of existing FEMA provisions. The 2017 Regulations were introduced to:

• Provide a clear, unified framework for the issue and transfer of securities by persons resident outside India (PROIs).
• Facilitate crossborder capital flows while ensuring adequate monitoring and compliance with FEMA.
• Reduce procedural bottlenecks and the need for casebycase approvals.
• Align Indias regime with international best practices for foreign investment in securities.

2. Definitions What is Covered?

Key terms defined in the Regulations include:

• Person Resident Outside India (PROI): Any individual, corporation, partnership, trust, or other entity that is not a resident of India as defined under FEMA.
• Security: Shares, debentures, bonds, warrants, convertible instruments, and any other instrument that confers a right to claim money, a share in assets or any derivative related to Indian assets.
• Transfer: Sale, assignment, conveyance, or any other disposition of a security to another party, whether by physical delivery or dematerialisation.
• Issue: Creation or allotment of new securities by a PROI, including rights issues, private placements, or public offerings.

3. Scope of the Regulations

The Regulations apply when a PROI wishes to:

• Issue Indianlinked securities to a resident or nonresident investor.
• Transfer already issued Indianlinked securities to another party (resident or nonresident).
• Hold securities that are backed by Indian assets such as Indian company shares, Indian government securities, or Indian realestate assets.

Transactions that fall outside the Regulations include ordinary foreign exchange transactions covered under other FEMA rules, and securities that are wholly offshore (i.e., not linked to Indian assets).

4. Core Provisions

4.1 Permission and Prior Approval

Generally, a PROI does **not** need prior RBI approval to issue or transfer securities, provided the following conditions are met:

• The security is fully backed by assets located in India and the assets are held in a recognized Indian depository or bank.
• The transaction is in compliance with the prevailing capital account convertibility norms.
• All applicable KYC and AML checks are completed.

If any of the above conditions are not satisfied, the PROI must obtain a specific No Objection Certificate (NOC) from the RBI or the appropriate Authorised Dealer (AD).

4.2 Valuation and Pricing

All securities must be priced at fair market value. Valuation must be performed by a Chartered Accountant or a SEBIregistered merchant banker, and the valuation report must be retained for a minimum of five years.

4.3 Transfer Restrictions

Transfers are subject to the following restrictions:

• The transferee must be either a resident of India or a PROI.
• If the transferee is a resident, the transfer must be reported to the Reserve Bank through the AD within 30 days of execution.
• For transfers between two PROIs, the transaction must be settled through an AD in a permitted foreign exchange manner.

4.4 Documentation Requirements

Essential documents include:

• Offer Letter / Issue Memorandum.
• Board resolution (if the issuer is a company).
• KYC documents of both issuer and investor.
• Valuation report (for new issues).
• Form A2 (Declaration of Realisation of Foreign Exchange).
• Applicable RBI/AD compliance forms.

4.5 Reporting Obligations

Both the issuer and the investor must file the following with their AD:

• Form A2 within 30 days of the transaction.
• Annual return of securities held by 31March of the subsequent financial year.

Failure to comply may lead to penalties ranging from INR1lakh to INR10lakh per violation, or a suspension of the ability to conduct further foreign exchange transactions.

5. Procedural Steps for Issuing Securities

1. Determine Eligibility: Verify that the security is fully backed by Indian assets and that the PROI satisfies the RBIs person resident outside India criteria.
2. Valuation: Engage a qualified valuator to determine market price.
3. Prepare Documentation: Draft the issue memorandum, obtain board approval, and compile KYC documents.
4. Engage an Authorised Dealer: Submit the issue package to an AD for clearance and filing of Form A2.
5. Obtain NOC (if required): If any condition in Section4.1 is not met, apply for RBIs NOC.
6. Issue Securities: Upon clearance, issue the securities and credit proceeds to the designated foreign exchange account.
7. PostIssue Reporting: File the required forms and maintain records for five years.

6. Procedural Steps for Transfer of Securities

1. Identify Transfer Type: Sale, gift, or other disposition.
2. Confirm Eligibility of Transferee: Ensure the recipient is either a resident or a PROI.
3. Execute Transfer Agreement: Include representation that the securities are backed by Indian assets.
4. Notify the AD: Submit the transfer deed and related KYC documents within 30 days.
5. Settle Payment: Use authorised foreign exchange channels; obtain ADs confirmation of compliance.
6. Update Records: Register the change of ownership with the depository and retain all documentation.

7. Compliance and Enforcement

The RBI monitors compliance through the AD network. Key compliance checks include:

• Verification of KYC and AML data.
• Crosschecking valuation reports against market data.
• Ensuring timely filing of Form A2 and annual returns.

Penalties for noncompliance can be monetary, or in severe cases, the RBI may direct the AD to block further foreign exchange transactions for the offending party.

8. Interaction with Other Regulations

The 2017 Regulations do not exist in isolation. They intersect with:

• Securities and Exchange Board of India (SEBI) regulations: Especially for public offerings and listed securities.
• Foreign Direct Investment (FDI) policy: Where the issuance involves equity in Indian companies.
• Income Tax Act, 1961: Tax implications on capital gains for both issuer and investor.

Compliance professionals must therefore adopt a holistic approach, checking against all relevant statutes.

9. Practical Considerations for Stakeholders

9.1 For Issuers (PROIs)

• Maintain a robust internal compliance function to manage documentation and reporting deadlines.
• Engage experienced legal counsel familiar with both FEMA and SEBI requirements.
• Plan for currency risk consider hedging strategies for the influx of foreign exchange.

9.2 For Investors (Residents & NonResidents)

• Conduct thorough due diligence on the underlying Indian assets.
• Verify that the issuer has complied with all RBI reporting obligations.
• Be aware of repatriation restrictions proceeds must be routed through an AD.

9.3 For Advisors & Intermediaries

• Stay updated on periodic RBI circulars that may amend the 2017 Regulations.
• Implement a checklistdriven workflow to avoid missing any filing deadlines.
• Maintain a secure repository for all KYC, valuation, and transaction documents.

10. Recent Amendments and Future Outlook

Since the original issuance, the RBI has issued several clarifications, notably:

• 2020: Introduction of a simplified SelfCertification model for certain lowvalue transfers (up to USD50,000) eliminating the need for prior AD approval.
• 2022: Alignment with the International Monetary Funds recommendations on capital account convertibility, allowing greater flexibility for crossborder security issuance.

Analysts anticipate further liberalisation, especially for green bonds and other ESGlinked securities, as India seeks to attract sustainable finance.

11. Conclusion

The Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India) Regulations, 2017, represent a pivotal step toward creating a transparent, efficient, and investorfriendly environment for crossborder securities transactions involving Indian assets. By clearly outlining the eligibility criteria, procedural steps, documentation, and reporting obligations, the Regulations reduce uncertainty for both issuers and investors. Nevertheless, strict compliance with RBI, SEBI, and tax regulations remains essential. Staying abreast of amendments and maintaining rigorous internal controls will enable stakeholders to harness the opportunities presented by these rules while mitigating regulatory risk.

For detailed guidance or casespecific advice, it is advisable to consult a legal or financial professional experienced in FEMA and international securities law.

Reference: Reserve Bank of India, Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India) Regulations, 2017, effective from 1April2017.