FOREIGN EXCHANGE MANAGEMENT (NON-DEBT INSTRUMENTS) (FOURTH AMENDMENT) RULES, 2024
Alpha Partners
Recognised Indian corporate commercial law firm based in Delhi NCR and Dubai
By Akshat Pande and Nivedita Guliani
Introduction
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The Ministry of Finance, Government of India, has issued the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 (“Rules”)[1], marking a significant update to the regulatory framework governing foreign investments in India. The changes encompass various aspects of foreign investment, including equity swaps, foreign portfolio investments, investments by Non-Resident Indians and Overseas Citizens of India, and the introduction of new sectors for foreign direct investment.
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Equity Swap Provisions
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The Rules introduce a significant new provision with Rule 9A, which formalizes the process of equity swaps between residents and non-residents. This rule allows for the transfer of equity instruments of an Indian company through swaps of equity instruments or equity capital of a foreign company, subject to compliance with Central Government rules and Reserve Bank of India (RBI) regulations. Specifically, Rule 9A also allows for 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 capital of a foreign company in compliance with the Foreign Exchange Management (Overseas Investment) Rules, 2022.? Previously, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 lacked specific provisions for such equity swaps. This new framework provides clarity and potentially facilitates cross-border mergers and acquisitions, though it maintains the requirement for prior government approval in applicable cases.
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Further, an amendment to Schedule I expands the ways in which Indian companies can issue equity instruments to non-residents. In addition to existing methods, companies can now issue such instruments against swaps of equity instruments, import of capital goods or machinery (excluding second-hand machinery), pre-operative or pre-incorporation expenses, and swaps of equity capital of foreign companies. It is pertinent to note that the amendment specifically states that “an Indian company may issue equity instruments to a person resident outside India against swap of equity instruments”. Thus, the ambiguity still continues as to whether an Indian company can only issue shares or its shares can be transferred in a swap.? Nevertheless, the swap of shares is a significant change and will facilitate and enhance inbound M&A activity.
On this our managing partner, Akshat Pande commented “Newly introduced Rule 9A allows share swap of a foreign company’s shares with shares with shares of an Indian company and clarifies the regulatory position. Similar amendment is carried out in the schedule which lays out the FDI policy.”
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Foreign Portfolio Investment (“FPI”)
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The amendment also brings about notable changes in the realm of FPI. Under the Rules, aggregate FPI up to the sectoral or statutory cap no longer requires government approval or adherence to sectoral conditions, provided it doesn't lead to a transfer of ownership or control from resident Indian citizens to non-residents. This marks a significant departure from the existing rules, which required government approval for FPI beyond 49% investment on a fully diluted basis. The amendment aims to streamline FPI processes and potentially encourage more foreign portfolio investment while maintaining safeguards against undesired shifts in company control.
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Non-Resident Indian (“NRI”) and Overseas Citizen of India (“OCI”) Investments
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The Rules brings important changes regarding investments by Non-Resident Indians and Overseas Citizens of India. An explanation to Rule 23 has clarified that investments made by Indian entities owned and controlled by NRIs or OCIs, including companies, trusts, and partnership firms incorporated outside India, will not be factored into the calculation of indirect foreign investment if made on a non-repatriation basis
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in compliance with Schedule IV of the rules. The clarificatory language has been inserted to specify which entities will fall within the purview of this explanation. This modification provides more clarity for NRI and OCI investments routed through any entity owned and controlled by NRIs and OCIs.
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Other Updates
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Several definitional updates have been introduced to align the rules with other relevant laws and regulations. The definition of "control" has been incorporated within the Rules. The definition of "startup company" has been updated to align with the latest government notifications.
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Further, an amendment has been made to the sectoral list provided under Schedule I under the head ‘other financial services’ to include White Label ATM Operations as a new sector open to foreign investment. The amendment allows 100% foreign direct investment in White Label ATM Operations through the automatic route, subject to specific conditions including minimum net worth requirements and compliance with RBI guidelines. This opens up a new area within financial services to foreign investment, which was not explicitly covered in the previous rules.
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Conclusion
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To conclude, the Rules introduce significant changes to India's foreign investment regulations. The important amendments include formalizing equity swap provisions, easing foreign portfolio investment rules, clarifying NRI and OCI investment calculations, and opening up White Label ATM Operations to foreign investment. These amendments aim to streamline processes, attract more foreign investment, and provide greater clarity for investors while maintaining necessary regulatory oversight.