The Ministry of Finance vide its notification dated August 16, 2024 amended the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”), by notifying the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (“Amending Rules”).
The NDI Rules govern the foreign investment and other foreign exchange dealings in non-debt instruments (such as equity shares, convertible securities) in India, along with sectoral limitation for making foreign direct investment in India and related regulations thereto.
KEY HIGHLIGHTS OF THE AMENDING RULES
CROSS BORDER SWAP OF SHARES: The Amending Rules aim to simplify cross-border share swaps and facilitate the issue or transfer of Indian company equity instruments in exchange for foreign company equity instruments.
Prior, to this amendment Indian companies were allowed to issue non-debt instruments to persons resident outside India against the swap of another Indian company only.
With the foregoing amendment, not only it magnifies investment opportunities in the M&A deal space but also evidences the government’s commitment to creating a more investor-friendly climate and promoting ease of doing business.
INVESTMENT MADE BY NRI OR OCI: The Amending Rules have now clearly stated by way of an explanation in the NDI Rules, that an investment made by an Indian entity which is owned and controlled by a Non-Resident Indian or an Overseas Citizen of India including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a Non-Resident Indian or an Overseas Citizen of India, on a non-repatriation basis in compliance with Schedule IV of these rules, shall not be considered for calculation of indirect foreign investment.
The foregoing explanation now provided amplifies and ensures consistency with respect to investments by NRIs and OCIs in India, as direct investment by these groups (on a non-repatriation basis) has been treated as domestic instrument.
The changes are expected to give boost to Indian economy by encouraging the India diaspora living outside India to partake in the India growth story and its economy.
ALIGNMENT OF “CONTROL” AND “STARTUP”: The Amending Rules have aligned the definition of “Control” in the Rules with the definition under the Companies Act, 2013 and the definition of the “Startup” with the definition as provided 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.
These changes make the above referred definition consistent across the regulatory framework.
FDI IN WHITE LABEL ATMs : The Amending Rules permit 100% Foreign Direct Investment (FDI) under the Automatic Route in White Label ATMs, subject to the following conditions as prescribed being fulfilled:
- Any non-bank entity intending to set up White Label ATMs (WLAs) should have a minimum net worth of one hundred crore rupees 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’, 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’.
- FDI in the WLAO will be subject to the specific criteria and guidelines issued by the Reserve Bank under the Payment and Settlement Systems Act, 2007
The foregoing changes made which is expected to boost financial inclusion nationwide.
With the changes to the Rules, and also mentioned in the Press Release by the Ministry of Finance, the key change of simplifying cross-border share swaps and provide for the issue or transfer of Indian company equity instruments in exchange for foreign company equity instruments, 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. Another key change brings further clarity on the treatment of downstream investments made by Overseas Citizen of India (OCI)-owned entities on a non-repatriation basis, aligning it with the treatment of Non-Resident Indian (NRI)-owned entities.
