English
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Introduction
On 20 January 2025, the Reserve Bank of India (“RBI”) amended the Master Direction on Foreign Investment in India, 2018 (“Master Directions”) (to access the amendment please click here). The amended Master Directions inter alia provide much needed clarity with respect to downstream investments by Foreign Owned and Controlled Companies (“FOCCs”) and introduce some other key changes, in relation to filing of Form DI, foreign investment through rights or bonus issue, foreign investments in Non-Banking Financial Companies (“NBFCs”), etc.
In this update, we discuss the key changes to the Master Directions and share our views on the same.
Some key amendments to the Master Directions
- Deferred payment arrangements by FOCCs
The Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“NDI Rules”) permits for deferred payment arrangements up to 25% of the total consideration for a period up to 18 months from the date of execution of the transaction documents, in connection with transfer of equity instruments between a resident and a non-resident.
However, there has been a long-standing debate on whether FOCCs were eligible to enter into such deferred payment arrangements as there was no explicit mention of FOCCs under the relevant provisions of NDI Rules. This debate was further fueled by notices being issued by the RBI to FOCCs for entering into deferred payment arrangements for foreign investments under the NDI Rules.
The amended Master Directions now clarifies the regulatory ambiguity by expressly stating that FOCCs can utilize deferred payment consideration mechanism and equity instrument swaps under the NDI Rules for structuring downstream investments. This is, however, subject to compliances under the NDI Rules for downstream investments in relation to sectoral caps, entry route, etc.
- Transfer of equity instruments on deferred payment basis, etc.
Earlier, if any transaction was executed based on deferred payment arrangements, there was no explicit requirement that the same has to be captured in the share purchase / transfer agreements. The amended Master Directions now requires that in case a transaction that contains deferred payment, escrow arrangement, and indemnification arrangements as per the NDI Rules, then such arrangement(s) have to be expressly captured in the principal transaction documents, and these arrangements cannot be an afterthought.
- Filing of Form DI
The Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instrument) Rules, 2019 provides for filing of Form DI in case of a downstream investment, within 30 days from the date of allotment of equity instruments. This filing has now been extended to foreign investments, wherein the initial investment was made by a resident entity that has later become a FOCC. Such reclassified investments are deemed to be a downstream investment and are now required to be reported within 30 days from the date of such reclassification, by the investor.
- Acquisition through rights issue or bonus issue
Previously, a foreign investment by way of rights issue or bonus issue was only subject to individual or sectoral caps. However, the amended Master Directions provides that foreign investments through such an issuance shall also be subject to entry routes, pricing guidelines, and other conditions laid down under the NDI Rules.
- Foreign Investment in NBFCs
In relation to foreign direct investment in NBFCs, the amended Master Directions clarify that the foreign investments could now be received by NBFCs to comply with the minimum net owned fund (NOF) criteria. Further, in case the license / registration is not granted to the NBFC, such investment shall have to be repatriated to the investee company or shall comply with the conditions prescribed for foreign investments in Indian companies that do not have any operations.
Our Thoughts
The amendments to the Master Directions inter alia provide much-needed clarity and flexibility for the FOCCs for structuring their foreign investments involving deferred payment arrangements as per the NDI Rules.
Further, the formal recognition of capturing the transfer of equity shares on a deferred payment basis in the principal document ensures that these important terms are clearly documented upfront, and promotes greater clarity and transparency.
The amended Master Directions also makes it simpler for the NBFCs to meet the statutory requirement of meeting the NOF criteria, by attracting foreign investments.
Lastly, although the amended Master Directions ensures that foreign investments align with broader economic policies, it may lead to increased compliance burdens and could slow down the flexibility previously available for foreign investments through rights or bonus issues.
The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.
