Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024

In pursuance of the Union Budget 2024-25 announcement by Union Minister for Finance and Corporate Affairs Smt. Nirmala Sitharaman, to simplify the rules and regulations for Foreign Direct Investment (“FDI”) and Overseas Investment (“OI”), as one of the initiatives, the Department of Economic Affairs, Ministry of Finance, vide notification dated August 16, 2024, has notified the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (the “Amendment Rules”), thereby amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (the “NDI Rules”).

Following are the key changes brought in through the Amendment Rules:

(a) The definition of the term ‘control’ has been aligned with the same meaning as assigned to it in the Companies Act, 2013, and for the purposes of a Limited Liability Partnership (“LLP”), ‘control’ has been defined as 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;

(b) Rule 2(an) which defines ‘startup company’ has been substituted with a new clause 2(an) for updating the definition to mean private companies incorporated under the Companies Act, 2013, and identified as a ‘start up’ under the notification of the Government of India number G.S.R. 127 (E), dated February 19, 2019, issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.

(c) A new Rule 9A relating to ‘Swap of equity instruments and equity capital’ has been inserted, which provides for the transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India by way of:

• swap of equity instruments; or

• 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 (the “OI Rules”), and the regulations specified by the Reserve Bank of India (“RBI”) from time to time.

Provided that prior government approval shall be obtained for transfer in all cases wherever government approval is applicable.

For the purposes of the above Rule 9A, the term ‘equity capital’ has been defined to have the same meaning as assigned to it under the OI Rules.

(d) The Explanation to Rule 23(7)(i) has been amended to exclude investments made by an Indian entity which is owned and controlled by a Non-Resident Indian (“NRI”) or an Overseas Citizen of India (“OCI”) including a company, a trust and a partnership firm incorporated outside India and owned and controlled by an NRI or an OCI through the non-repatriation route from being considered for the calculation of indirect foreign investment.

The NDI Rules had previously excluded investments made by Indian entities owned and controlled by NRI through non-repatriation route from the calculation of ‘indirect foreign investment.' The extension of this exclusion to entities owned and controlled by OCI, including foreign entities, should provide for easier investments by such OCI-controlled entities.

(e) Paragraph 1(d) of Schedule I has been amended, thereby providing for the issuance of equity instruments by an Indian company to person resident outside India against swap of equity capital of a foreign company, in compliance with the rules and regulations specified by the Central government and the RBI, including the OI Rules.

(f) One hundred percent (100%) FDI under the automatic route has been allowed in White Label ATM Operations (“WLAO”), subject to the following conditions:

• Non-bank entity intending to set up White Label ATMs (“WLAs”) should have a minimum net worth of Rupees One Hundred Crore Only (INR 100,00,00,000/-) as per the latest financial year’s audited balance sheet, to be maintained at all times.

• In case the entity is also engaged in any ‘Other Financial Services’ as referred to in Schedule I of the NDI Rules, then the foreign investment in the company setting up WLA shall also comply with the minimum capitalisation norms, if any, for foreign investments in such ‘Other Financial Services’.

• Such foreign investments shall also be subject to the specific criteria and guidelines issued by the RBI under the Payment and Settlement Systems Act, 2007.

Previously, the NDI Rules permitted for the share swap transactions where an Indian company could issue equity instruments to a non-resident against a swap of equity instruments of another Indian company.

While the OI Rules provisioned for an Indian company making an overseas direct investment by way of swap of securities, since the NDI Rules did not previously provide for the transfer of securities of an Indian company to a non-resident by a resident in exchange for securities of a foreign company, prior RBI approval was required.

This discrepancy with respect to cross border share swap has now been addressed by the newly notified Amendment Rules.

The Amendment Rules now permit cross-border share swaps between a person resident in India and a person resident outside India, allowing Indian shareholders to swap their shareholding of a company in India for shares of an foreign entity (i.e., a swap-up) or vice versa. In other words, secondary cross-border swaps, which were previously subject to regulatory approval in all circumstances, are now permitted. Needless to add, considerations around valuation, deferred consideration, eligibility limits for overseas investments would continue to apply notwithstanding this relaxation.

The Amendment Rules represent a significant step forward in aligning the regulatory framework for cross-border investments with the evolving global business landscape. The Amendment Rules have introduced much-needed clarity and flexibility, particularly in the area of cross border share swaps between Indian and foreign entities. These changes not only simplify the process for cross-border investments but also enhance India’s attractiveness as a destination for foreign capital.

About the authors: Varnika Sharma is a Partner and Satyajit Nair is an Associate at Poovayya & Co.

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