Cross-border share swaps have emerged as a sophisticated mechanism in global mergers and acquisitions, enabling exchange of equity securities without real flow of remittance of investment amount as compared to an ordinary investment transaction in relation to subscription of securities.
In principle, a share swap is a transaction enabling a shareholder of a company to exchange its own shares in exchange for the shares of another company without paying any additional consideration against the shares being purchased pursuant to the share swap agreement. Typically, from domestic purview, previously such share swap transactions were seen in a transaction involving holding-subsidiary structure, however, with the passage of time, there has been slight inclination among the strategic investors towards the share swap arrangements.
Until recently, the Indian legal framework posed significant regulatory hurdles to the adoption of such mechanisms from a cross-border perspective, however, the introduction of the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 (“Amendment Rules”), can be seen as a major shift in India’s approach, thereby, allowing flexibility with précised legal approach in relation to cross-border equity swaps.
Prior to the aforementioned Amendment Rules, the permissibility of share swaps under Indian exchange control laws was limited. The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) allowed an Indian company to issue its own equity instruments to a person resident outside India against swap of equity instruments of another Indian company being under the automatic route sector wherein 100% foreign direct investment was allowed without any prior approval requirement.
Under the Amendment Rules, equity instruments of an Indian company may be transferred between a person resident in India and a person resident outside India in exchange for: (i) equity instruments of another Indian company; or (ii) equity capital of a foreign company — in each case, subject to the specified terms and conditions.
By expanding the scope of permissible share swap structures, the Amendment Rules enhances transactional flexibility, reduces dependency on government approvals, and promotes legal certainty in cross-border deals. It also enables Indian companies especially start-ups and tech companies seeking to optimize their corporate structures to adopt globally recognized mechanisms for expansion, exit, or strategic consolidation.
In conclusion, the Amendment Rules represents a major leap forward in India’s foreign exchange regulatory architecture. By integrating legal clarity, procedural flexibility, and structural diversity into the share swap regime, it equips companies with the tools necessary to engage in sophisticated cross-border transactions. Having said that while the introduction of the Amendment Rules represents a significant step forward, it is imperative that the concerned governmental authorities undertake a comprehensive assessment of the existing fiscal framework to ensure alignment with the objectives of the amended regulatory regime. Absent such harmonization, the practical utility and sustainability of the liberalized options may be materially constrained.
