RBI Published Updated Master Directions on Foreign Investment in India

Reserve Bank of India (RBI) has recently reviewed and updated the ‘Master Direction – Foreign Investment in India’ (Updated FDI Master Directions) on January 16 and 20, 2025. The RBI has issued the Updated FDI Master Directions with the objective of reconciling and aligning the same with the amendments made to the applicable Indian foreign exchange laws and clarifying certain regulatory ambiguities under such laws.

 

The key changes introduced by RBI under the Updated FDI Master Directions inter alia include the following:

 

1. Precedence of FEMA notifications over the Updated FDI Master Directions

Paragraph 1.1 of the Updated FDI Master Directions states that in case of any inconsistency(ies) between the Updated FDI Master Directions and the Foreign Exchange Management Act, 1999 (FEMA) notification(s), the latter shall prevail.

 

2. Clarifications on foreign investment to be made to DPIIT

Under Paragraph 5.2 of the Updated FDI Master Directions, a Note has been added to state that in case of seeking any clarification pertaining to foreign investment in a sector or related conditions, a request may be made to the Department of Promotion of Industry and Internal Trade, Ministry of commerce and Industry, Government of India (DPIIT).

 

3. Issue of Share Based Employee Benefits to Persons Resident Outside India

The paragraph on Issue of Employees Stock Options and Sweat Equity Shares has been expanded to also include Share Based Employee Benefits to persons resident outside India. A similar position was already captured under Rule 8 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules).

 

4. Reclassification of foreign portfolio investment by FPI to FDI

In line with the operational framework for reclassification of foreign portfolio investment by Foreign Portfolio Investor (FPI) to FDI published by the RBI on November 11, 2024, it has been clarified under the Updated FDI Master Directions that the reclassification of foreign portfolio investment of a foreign portfolio investor to FDI shall be in accordance with the framework issued by the RBI vide A.P. (DIR Series) Circular No. 19 dated November 11, 2024.

 

5. Transfer of equity instruments on deferred payment basis, and/or, under indemnification/escrow, arrangement

In relation to transfer of equity instruments on deferred payment basis, and / or under indemnification / escrow arrangement, it has been clarified under the Updated FDI Master Directions that any transaction intended to be undertaken using above arrangement(s) shall require the share purchase/transfer agreement to contain the respective clause and related conditions for such arrangement.

 

6. Transfer by way of swap of equity instruments and equity capital

A new Paragraph 7.14 on transfer by way of swap of equity instruments and equity capital has been inserted under the Updated FDI Master Directions. Concomitant changes have also been under Paragraph 1.4.4 (Other Modes of Issue) of Annex I on Purchase/ Sale of equity instruments of an Indian company by a person resident outside India. A similar position was introduced under Rule 9-A of the NDI Rules recently as well.

 

7. Downstream Investment

In relation to downstream investment, a clarificatory note has been added under the Updated FDI Master Directions to state that Based on the guiding principle of the downstream investment, the arrangements which are available for direct investment under the Rules such as investment by way of swap of equity instruments/equity capital, payment arrangements/mechanism as per Rule 9(6) of the NDI Rules etc, shall also be available for the purpose of downstream investment provided that the transaction does not circumvent the provisions contained in Rule 23 of the NDI Rules, including the restrictions on use of borrowed funds for downstream investment.

 

It has been further clarified that, for cases where the original investment made in the investee entity was made as a resident but later the investor entity becomes owned and/or controlled by persons resident outside, the same shall be reckoned as downstream investment from the date on which the investor entity is owned and/or controlled by persons resident outside India. Such downstream investment shall be in compliance with the applicable entry route and sectoral cap and shall require to be reported by the investor entity within 30 days from the date of such reclassification in Form DI.

 

8. References to the RBI

In relation to references to the RBI, it has been stated that Any requests for clarification pertaining to foreign investment framework may be made to the Authorized Dealer (AD) bank concerned. The AD bank may, if required, forward the request to the concerned Regional Office of Reserve Bank for guidance. Such representation shall be routed through a nodal office of the AD bank specifically designated for this purpose, along with specific recommendation/ observations, FEMA provisions, reason for submission to Reserve Bank and relevant documents. The jurisdiction of a regional office of Reserve Bank shall be as per the registered office of the Indian investee entity.

In addition to the above aspects, the RBI has also added clarificatory language regarding various aspects, such as foreign venture capital investor, permitted residents by persons resident in India, definitions of certain key terms (including inter alia Indian company, control, ESOP, etc.), among others. This has been done in order to harmonize the Updated FDI Master Directions with the various amendments made to rules, regulations, and other notifications issued under FEMA, from time to time.

 

For more details, kindly refer to the Updated Master Directions, available by clicking on this link.