Updates to Foreign Direct Investment (FDI) Framework
With the purpose to streamline and clarify the regulatory framework governing Foreign Direct Investment (FDI) in India, the Department of Economic Affairs (DEA), Ministry of Finance, has promulgated an amendment to the extant Foreign Exchange Management (Non-Debt Instruments) 2019 (NDI Rules) via notification S.O. 3492(E) dated August 16, 2024. The key amendments are summarized as follows:
Rule 2 – Changes in Definitions
Control
Previously, the term “Control” under the NDI Rules was explicitly defined only for the purposes of Rule 23 – Downstream Investment. Pursuant to the stated amendment, the definition of “control” has been provided for the NDI Rules and aligned with the definition provided in the Companies Act 2013:
“Control shall have the same meaning as assigned to it in the Companies Act 2013, and for the purposes of Limited Liability Partnership shall mean the right to appoint a majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP.”
Startup Company
The definition of Startup Company has been revised to align with the latest notification from the Department for Promotion of Industry and Internal Trade (DPIIT) dated February 19, 2019:
“Startup company means a private company incorporated under the Companies Act 2013 (18 of 2013) and identified as ‘startup’ 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, as amended from time to time.”
Rule 9 – Government Approval
In respect of the transfer of equity instruments of an Indian company from a person resident in India to a person resident outside India, or between persons resident outside India, it has been clarified that government approval will be required in all cases where either the sector is under government approval route or approval of government is required for any other reason.
Introduction of Rule 9A – Swap of Equity Instruments
Paragraph (d) of Schedule I of the NDI Rules permitted the issuance of equity shares by an Indian company against swap of equity instruments as a consideration from a person resident outside India. However, the swap of equity instruments by way of transfer was not specifically addressed.
Further, the Foreign Exchange Management (Overseas Investment) Rules 2022 permitted overseas investment by an Indian party by way of swap of securities. While in the case of overseas investment, provisions for swap of securities were present, there were no corresponding provisions for such acquisition by way of transfer in the case of the NDI Rules, creating confusion about seeking RBI approval in such cases.
The current amendment now explicitly allows the swap of equity instruments by way of transfer, simplifying cross-border share swaps, subject to compliance with the provisions of both the NDI Rules and the Foreign Exchange Management (Overseas Investment) Rules 2022 (OI Rules).
Clarification on Downstream Investment
The amendment provides clarity regarding the treatment of downstream investments made by entities owned by Non-Resident Indians (NRIs) or Overseas Citizens of India (OCI) on a non-repatriation basis. Now, investments made by Indian entities owned and controlled by foreign companies, trusts, or partnerships controlled by NRIs/OCI on a non-repatriation basis shall not be considered when calculating indirect foreign investment.
FDI in White Label ATM Operations
100% FDI in White Label ATM operations under the automatic route, subject to compliance with the conditions specified therein, has been introduced.
These amendments reflect the Government’s ongoing commitment to fostering a foreign-investor-friendly environment, reinforcing efforts to simplify regulations and promote Ease of Doing Business. By enhancing clarity and reducing regulatory complexities, these changes aim to create a more conducive atmosphere for foreign investments in India.
Link to amendment: Click Here