The Department of Economic Affairs, Ministry of Finance (MoF) has notified Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 (NDI Amendment Notification), with an objective to simplify rules and regulations for foreign direct investment and overseas investment in the country.
In its press release regarding the NDI Amendment Notification, the MoF has inter alia stated that the amendments aim to simplify cross-border share swaps and provide for the issue or transfer of Indian company equity instruments in exchange for foreign company equity instruments. This will facilitate the global expansion of Indian companies through mergers, acquisitions, and other strategic initiatives, enabling them to reach new markets and grow their presence worldwide.
The key aspects under the NDI Amendment Notification include the following:
- Swap of equity instruments and equity capital: The transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India may be by way of–– (i) swap of equity instruments, in compliance with the rules prescribed by the central government and the regulations specified by the RBI from time to time; (ii) swap of equity capital of a foreign company in compliance with the rules prescribed by the central government including the Foreign Exchange Management, (Overseas Investment) Rules, 2022, and the regulations specified by the RBI from time to time. However, prior government approval is required to be obtained for transfer in all cases wherever government approval is applicable.This amendment brings much needed clarity on swap arrangements from a foreign exchange laws standpoint, specifically in respect of FDI / ODI swap arrangements.
- Relaxation in sectoral cap limits for Foreign Portfolio Investment: The sectoral cap limits for foreign portfolio investment limit have been removed under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), which were earlier capped at an upper limit of 49% (forty-nine percent). Foreign portfolio investment is now permitted up to the respective sectoral or statutory cap subject to compliance with applicable sectoral conditions as laid down under the NDI Rules.
- Standardizing the definition of ‘control’ to ensure consistency with other Acts and laws: Pursuant to the NDI Amendment Notification, the definition of ‘control’ has been inserted in Rule 2 of the NDI Rules – “(da) “control” shall have the same meaning as assigned to it in the Companies Act, 2013 and for the purposes of Limited Liability Partnership, shall mean the right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP”.
- Harmonizing the definition of ‘startup: The definition of ‘startup company’ under the NDI Rules has been revised to harmonize the same with the Government of India’s notification G.S.R. 127 (E) dated February 19, 2019, issued by the Department for Promotion of Industry and Internal Trade. Pursuant to such harmonization, the revised definition of ‘startup company’ is – “(an) “startup company” means a private company incorporated under the Companies Act, 2013 (18 of 2013) and identified as “startup” under the notification of the Government of India number G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, as amended from time to time”.
- Exclusion of Certain Investments: The amendment to Rule 23(7)(i) excludes investments made by Indian entities owned and controlled by Non-Resident Indians (NRIs) or Overseas Citizens of India (OCIs) through the non-repatriation route from the calculation of indirect foreign investment. Following this, investments made by entities owned and controlled by OCIs will now be treated the same as those made by entities owned and controlled by NRIs. These investments will be excluded from the calculation of indirect foreign investment. This change is anticipated to encourage more OCIs to invest in India through their owned and controlled entities.
- Issuance of Equity Instruments: Paragraph 1(d) of Schedule I has been amended to allow Indian companies to issue equity instruments to non-residents against the swap of equity capital of foreign companies, in compliance with relevant rules and regulations. By allowing these equity swaps, the amendment aims to encourage more foreign investment into Indian companies. It provides a structured and regulated pathway for non-residents to acquire stakes in Indian businesses, thereby fostering international collaboration and growth. This change is expected to enhance the attractiveness of Indian companies to foreign investors, as it simplifies the process of acquiring equity in exchange for foreign assets.
- 100% FDI in White Label ATM Operations (WLAO): The amendment allows 100% FDI under the automatic route for WLAO. This has primarily been done with the Consolidated FDI Policy (effective from October 15, 2020). This amendment is subject to the following conditions:
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- Any non-bank entity planning to establish White Label ATMs (WLAs) must have a minimum net worth of INR 1,000,000,000 (approximately USD 12,000,000) according to the latest audited financial statements, and this net worth must be maintained at all times.
- If the entity is also involved in any ‘Other Financial Services,’ then foreign investment in the company setting up the WLA must adhere to the minimum capitalization norms, if applicable, for foreign investments in such ‘Other Financial Services.’
- FDI in the WLAO will be subject to the specific criteria and guidelines issued by the RBI under the Payment and Settlement Systems Act, 2007.
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Conclusion
The NDI Amendment Notification mark a significant step forward in India’s regulatory landscape, particularly in the realm of cross-border investments and financial inclusivity. By permitting cross-border share swaps without prior RBI approval, the amendments simplify the investment process, making India a more attractive destination for foreign capital. This change not only aligns India’s regulations with global standards but also provides greater clarity and flexibility for international investors.
Changes brought forth such as the harmonization of the definition of a “startup company” with the latest government policies ensures that the regulatory framework remains current and supportive of innovation and entrepreneurship. This alignment is crucial for fostering a conducive environment for startups to thrive. Additionally, the amendments bring consistency in the treatment of downstream investments by entities owned and controlled by OCIs and NRIs, ensuring a uniform approach to investment regulations. This clarity is essential for maintaining investor confidence and promoting a stable investment climate. Overall, these amendments reflect a progressive approach to regulatory reform, aimed at fostering economic growth, innovation, and financial inclusion in India.
For more details, kindly refer to these amendments notified by the MoF, available by clicking on this link.
Authors & Contributors
Partner(s):
Associate(s):
Keshav Pareek
Ishaan Gupta
Amitabh Abhijit