Regulatory Update: Amendments to the Foreign Exchange Non-Debt Instrument Rules
The Ministry of Finance has introduced amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) vide a notification dated 16 August 2024. The amendments introduced are aimed towards simplifying cross border share swaps and harmonizing key definitions under the NDI Rules with the relevant legal frameworks in India. In this update, we discuss the key changes brought to the NDI Rules.
- Enabling share swap transactions
Previously, NDI Rules provided for issuance of equity instruments of an Indian entity to a person resident outside India against swap of equity instruments of another Indian entity. However, transfer of equity instruments of an Indian company between persons resident in India and persons resident outside India against swap of equity instruments of an Indian entity or swap of equity capital of a foreign entity was not specifically covered under the NDI Rules. Therefore, such share swap transactions required prior RBI approval. Now, Rule 9A has been added under the NDI Rules expressly allowing cross border share swap transactions by transfer of equity instruments of an Indian company between persons resident in India and persons resident outside India.
With this change, secondary share swap transactions are simplified, especially where no government approval is required, for instance, where the Indian company is engaged in a sector under the automatic route. In cases where government approval is required, sector-related or otherwise, such approval must be taken.
- Foreign Investment by Overseas Citizens of India
Prior to the amendment, investments made on a non-repatriable basis by an Indian entity which is owned and controlled by non-resident Indians were not treated as indirect foreign investment. Now, this provision has been extended to investments made on a non-repatriable basis by an Indian entity which is owned and controlled by overseas citizens of India.
- Relaxations in limits on investments made by Foreign Portfolio Investors (FPIs)
Earlier, the NDI Rules provided for an aggregate limit on investments made by FPIs of 49% of the paid-up capital of the investee company on a fully diluted basis or the sectoral cap, whichever is lower. Now, the cap of 49% is removed, thereby increasing the threshold for FPI investments up to the sectoral limits where such limits are higher than 49%.
- Aligning definition of ‘control’ with Companies Act, 2013
The concept of ‘control’ is relevant to determine indirect foreign investment received by an Indian entity from a foreign owned or controlled entity under Rule 23 of the NDI Rules. Additionally, Schedule II which deals with purchase or sale of equity instruments by FPIs also provides for a concept of common control for the purpose of determining the FPI investor group.
Prior to the amendment, the term ‘control’ was specifically defined under Rule 23 and Schedule II. In order to bring in consistency within the NDI Rules and with the Companies Act, 2013, the definitions provided under Rule 23 and Schedule II have been omitted, and a new definition of ‘control’ has been inserted in Rule 2 which contains the common definitions of the terms used within the NDI Rules.
While no material change has been carried out pursuant to this change, however, now the term ‘control’ includes control by persons acting ‘individually or in concert, directly or indirectly’.
- Harmonizing the definition of ‘start up’ company
The Department of Promotion of Industry and Internal Trade (DPIIT) notification dated 19 February 2019 provides for the updated criteria to recognize a company as a start-up. The definition of ‘start-up company’ under the NDI Rules has been revised to make it in line with the updated criteria as per the latest DPIIT notification.
- Clarifications on obtaining government approval
Under the NDI Rules, transfer of equity instruments of an Indian entity by a person resident outside India to another person resident outside India is generally permitted if the Indian company is engaged in a sector in which foreign investment is permitted under the automatic route. Prior to the amendment, the NDI Rules provided that government approval is required for sectors in which foreign investment is allowed under the approval route.
Now, the amendment clarifies that the requirement for obtaining prior approval is not limited to specified sectors but is applicable generally wherever government approval is mandated.
- Foreign investment in white label ATM operators
The consolidated Foreign Direct Investment Policy, 2020 (FDI Policy) allows 100% foreign direct investment in white label ATM operators under the automatic route. The NDI Rules have been amended to align the sectoral cap in this sector with the FDI Policy.
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.