Background
Earlier this year, the Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman, in her budget speech announced the intent to simplify the regulatory framework governing Foreign Direct Investments ("FDI") and Overseas Investments ("OI"). Subsequently, through a recent notification dated August 16, 2024, the Ministry of Finance amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("NDI Rules") vide the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 ("Amendment Rules").
The principal objective of the Amendment Rules is to simplify cross-border equity share swaps and provide for the issue/transfer of equity instruments of Indian companies in exchange for the equity instruments of foreign companies. Other changes under the purview of the Amendment Rules include amending the definitions of 'start-ups' and 'control' to align them with the definitions under other laws, and permitting 100% FDI through the automatic route in white label ATM operations.
Unpacking the Key Changes
Below we have set forth the key changes introduced by the Amendment Rules:
- Facilitation of Swap of Equity Instruments and Equity Capital: The introduction of Rule 9A enables the transfer of equity instruments between a person resident in India and a person resident outside India, through swap arrangements. This provision allows for the exchange of equity instruments between an Indian company and a foreign entity in compliance with the rules prescribed by the Central Government and the Reserve Bank of India ("RBI"). Rule 9A also provides for the transfer of equity instruments by way of swap of equity capital of a foreign company in compliance with the Foreign Exchange Management (Overseas Investment) Rules, 2022. Similar amendments have been made to Schedule 1 of the NDI Rules to allow for the facilitation of swap of equity instruments and equity capital against the issue of securities by an Indian company to a person resident outside India.
- Clarifying Downstream Investments by OCI-owned Entities: The Amendment Rules clarify that investments made by Overseas Citizen of India ("OCI") owned entities on a non-repatriation basis will not be considered for determining the total amount of indirect foreign investment. This provision addresses a long-standing ambiguity in the regulatory framework concerning investments made by OCI-owned entities. It ensures that OCI-owned entities are treated at par with Non-Resident Indian ("NRI") owned entities.
- Harmonization of Definitions: The definition of 'control' has been standardized to align it with the definition under the Companies Act, 2013, and the definition of 'startup company' has been harmonized with the Government of India's notification G.S.R. 127 (E) dated February 19, 2019, which was issued by the Department for Promotion of Industry and Internal Trade.
- Facilitation of FDI in White Label ATMs: The Amendment Rules permit 100% FDI in White Label ATM Operations under the automatic route. White Label ATMs are ATMs that are owned and operated by non-bank entities, such as Tata Communication, Hitachi, and India 1 Payments, which have been approved by the RBI.
- Government Approval for Equity Transfers: It has now been mandated that all transfers of equity instruments involving non-residents, whether buying, selling, or swapping equity, must follow the prescribed approval procedures, whenever government approval is applicable. Previously, government approval was only mandated if the Indian company was engaged in a sector requiring approval under the Government route.
Conclusion
One of the most notable changes introduced by the Amendment Rules is the introduction of a provision allowing Indian companies to issue or transfer equity instruments in exchange for foreign company equity. This amendment aligns with the government's vision to create a more investor-friendly environment and enhance India's appeal as a global investment hub. This amendment will also act as a stimulus to boost foreign investment in India as well as cross-border mergers and acquisitions. The Amendment Rules are expected to facilitate global expansion for Indian businesses and create a more streamlined, transparent, and investor-friendly environment, supporting the government's goals of economic growth and global competitiveness.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.