The Ministry of Finance notified the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (“Amendment”) on 16th August, 2024 which has introduced several key changes to the existing regulatory framework governing foreign investments in India. This amendment modifies the previous provisions under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”), to address emerging economic realities and streamline the investment process.
Key Changes
- Definitions
The definition of “Startup” has been amended to make it consistent with 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.
Accordingly, only those entities will be considered as a Startup:
- which is a private limited company / partnership firm / limited liability partnership (LLP) for a period of 10 years from the date of incorporation or registration;
- whose turnover for any of the financial years since incorporation / registration has not exceeded INR 1,00,00,00,000/- (Indian Rupees One Hundred Crores only);
- which is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Further, a definition of “Control” has also been incorporated under the rules preventing any interpretational theories for the same and providing clarity to the existing as well as newly added rules to the regime.
- Transfer by Person Resident outside India
Another change brought by this Amendment is that any transfer to be done by a person resident outside India by way of sale or gift of the equity instruments of an Indian company to any person resident outside India shall follow the procedure laid down for government approval wherever such approval is applicable. Previously, such approval was only required in cases where the company was engaged in a sector which requires government approval.
- Share Swaps for Transfer of Equity Instruments
The Amendment has allowed for a 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. Prior to this Amendment, the swap of equity instruments of an Indian Company was only allowed against an issuance of equity instruments to a person resident outside India under the NDI Rules, if the Indian investee company is engaged in an automatic route sector. Government approval will be necessary for such transfers when sectoral caps or other requirements under the Foreign Exchange Management Act, 1999 are in effect. However, following the Amendment, secondary share swaps for companies in sectors that fall under the automatic route can now proceed more quickly.
- Downstream Investment
An investment made by an Indian entity which is owned and controlled by a Non-Resident Indian (“NRI”) or an Overseas Citizen of India (“OCI”) including a company, a trust and a partnership firm incorporated outside India and owned and controlled by an NRI or OCI, on a non-repatriation basis has been excluded from being considered as an “indirect foreign investment”. Consequently, these investments will not be included in the calculation of indirect foreign investments and will not be regarded as downstream investments. This amendment brings the OCI-owned companies at par with the companies owned by the NRIs.
- Foreign Portfolio Investment (“FPI”)
The Amendment revises the conditions for FPI by eliminating the specific 49% ownership threshold and aligning the requirement with the sectoral or statutory cap. It stipulates that such investments will not need government approval or sectoral condition compliance, provided they do not result in transferring ownership and/or Control of a resident Indian company from Indian citizens to persons resident outside India. Investments exceeding this limit, however, will still require government approval and adherence to sectoral conditions as outlined in the rules.
- White Label ATMs
An additional entry for White Label ATMs has been added allowing 100% Foreign Direct Investment (“FDI”) through automatic route thereby making the rules consistent with the Consolidated FDI Policy of 2020. White-label ATMs are the ATMs which are owned by entities other than the banks. Such investment will be subject to the specific criteria and guidelines issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007) and other conditions as provided in the Amendment.
Conclusion
The Amendment concludes to be a significant improvement of the regulatory framework on foreign investments in India. The Amendment is in line with the government's approach simplifying the FDI investments in India and creating a more investor-friendly environment. The changes have been made sure that definitions are harmonized with the existing government notifications, revised the scope of approvals that foreign investors need to have for secondary transfers and allowed for share swaps of securities of foreign companies as well. The removal of the 49% threshold for FPIs and inclusion of White Label ATMs under 100% FDI further reflects a shift in policy as well as adaptation towards current economic realities. With these modifications, investment procedures will be more efficient by reducing regulatory burdens and providing more flexibility to domestic and foreign investors.
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