INTRODUCTION
The Hon’ble Finance Minister during her speech of Union Budget 2024-25 had announced that the rules and regulations for foreign direct investments and overseas investment rules will be simplified to facilitate foreign direct investments and nudge prioritisation. In line with the said announcement, the Ministry of Finance (‘MoF’) notified the Foreign Exchange Management (Non -debt Instruments) (Fourth Amendment) Rules, 2024 vide notification dated August 16, 2024 (‘Amendment Rules’) which amended the existing Foreign Exchange Management (Non-debt Instrument) Rules, 2019 (‘NDI Rules’). The Amendment Rules, inter alia, has allowed swap of equity instrument in case of transfer or issue of shares involving non residents which includes acquiring equity capital of foreign company as consideration in accordance with Foreign Exchange Management (Overseas Investment) Rules 2022 (‘ODI Rules’), aligned the definition of ‘control’ and ‘start-up company’, clarified on Indian entities overseas investment on non-repatriation basis for the purpose of indirect foreign investments.
WHAT IS NDI RULES AND ODI RULES?
The NDI Rules regulate foreign direct investment in India through issuance of non-debt instrument by an Indian entity which includes equity shares, preferences shares or debentures which are compulsory convertible in nature. Whereas ODI Rules governs investments by Indian entities in equity capital of foreign companies i.e. equity shares or perpetual capital that are irredeemable of foreign entity in nature of fully and convertible instruments.
KEY AMENDMENTS
A.Cross Border Share Swap in case of Transfer/Issuance
The Amendment Rules has inserted a new Rule 9A which allows transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India by way of a swap of equity instruments in another Indian entity or swap of equity capital in foreign company in accordance with ODI Rules.
Further, the Amendment Rules, in Schedule 1(d) has also permitted an Indian company to issue equity instruments to a person resident outside India against the swap of equity instrument of Indian Company or equity capital of foreign company in accordance with ODI Rules.
B. Definition of control and startup company
The Amendment Rules has inserted the definition of ‘control’ in the NDI Rules which was earlier defined only in Rule 23 of NDI Rules applicable for downstream investments. As per the Amendment Rules, the term ‘control’ shall mean as defined under the the Companies Act, 2013 and for the limited liability partnership, right to appoint majority designated partners where such designated partners have control over the policies of the limited liability partnership.
Further the definition of ‘startup company’, is revised to mean any private company incorporated under the Companies Act, 2013 and identified as ‘startup’ under the notification, dated the February 19, 2019, issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry (‘DPIIT’), as amended from time to time. Under the said DPIIT notification, the eligibility criteria for startups are prescribed i.e. (i) the turnover of a startup since incorporation shall not exceeded INR 100 crores (ii) such startup is in existence of not more 10 years from the date of its incorporation; and (iv) the entity is working towards innovation, development or improvement of products or employment generation. Before the amendment the ‘startup company’ defined as a private company incorporated under the Companies Act, 2013.
C. Exclusion of Non Repatriable Investment
The Amendment Rules has inserted an explanation in the definition of ‘indirect foreign investment’ to clarify that any investments made by an Indian entity overseas which is owned or controlled by non-resident or overseas citizen of India and on a non-repatriation basis shall not be counted for the purpose of indirect foreign investment under Rule 23 of NDI Rules.
D. Foreign portfolio investment without government approval
This Amendment Rules in Schedule 1, para 3(a)(iii), eliminated the permissible threshold upto 49% of the paid-up capital on a fully diluted basis for foreign portfolio investments and is now linked to sectoral or statutory cap.
E. 100% foreign investment under automatic route in white label ATMs
The Amendment Rules has further amended Schedule 1 of the NDI Rules, to permit 100% foreign direct investment under automatic route in White Label ATM Operations, subject to the condition prescribed. ATMs set up, owned and operated by non-bank entities in accordance with Payment and Settlement Act 2007 are called White-Label ATM.
CONCLUSION
The Amendment Rules aims to simplify cross-border share swaps and permits the issuance or transfer of equity instruments by Indian companies in exchange for those from Indian or foreign companies. This move is expected to support Indian businesses in their global expansion through mergers, acquisitions, and other strategic initiatives, allowing them to access new markets and enhance their international presence. Another key update provides clarifications on the treatment of investments by Indian entities outside India which are owned by non-residents or overseas citizens of India on a non-repatriation basis. These changes highlight the government’s dedication to fostering a more favourable environment for foreign investment, ultimately driving India’s economic growth and integration into the global economy.
Source
https://static.pib.gov.in/WriteReadData/specificdocs/documents/2024/aug/doc2024816377701.pdf https://fifp.gov.in/Forms/FEM_NDI_RULES_2019.pdf https://dpiit.gov.in/sites/default/files/notification_Definition_StartupIndia_06July2021.pdf https://dea.gov.in/sites/default/files/Foreign%20Exchange%20Management%20%28Overseas%20Investment%29%20Rules%2C%202022.pdf
