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 primary aim of these Amendment Rules is to simplify the process of cross-border equity share swaps by facilitating the issue and transfer of equity instruments between Indian and foreign companies. Additionally, the amendments revise key definitions, such as ‘start-ups’ and ‘control,’ to harmonize them with existing laws, and permitting 100% FDI in white label ATM operations via the automatic route.
Key Amendments: Overview
Outlined below are the material amendments introduced by the Amendment Rules:
- Standardization of Terminology: The Amendment Rules standardize the definition of ‘control’ to align it with the Companies Act, 2013, ensuring consistency across regulatory frameworks. This change reduces ambiguity and simplifies the interpretation of control in corporate transactions. Additionally, the definition of ‘startup company’ has been aligned with the Government of India’s notification G.S.R. 127 (E) dated February 19, 2019, issued by the Department for Promotion of Industry and Internal Trade. This alignment ensures that the criteria for what constitutes a startup are uniformly applied, facilitating clearer compliance requirements.
- Facilitation of Swap of Equity Instruments and Equity Capital: The introduction of the new 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: Another significant amendment clarifies how downstream investments by entities owned or controlled by Overseas Citizens of India (OCI) will be treated when made on a non-repatriation basis. The updated Rule 23(7) now aligns the treatment of investments by OCI-owned entities with that of Non-Resident Indian (NRI) entities. Such investments will no longer count toward the calculation of indirect foreign investment, encouraging greater investment by OCIs in India.
- 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.
- Facilitation of FDI in White Label ATMs: The Amendment Rules permit 100% FDI in White Label ATM Operations under the automatic route subject to a certain criterion. Non-bank entity intending to set up White Label ATMs (“WLAs”) should have a minimum net worth of INR 100,00,00,000/- (Indian Rupees One Hundred Crore Only) as per the latest financial year’s audited balance sheet, to be maintained at all times. In case the entity is also engaged in any ‘Other Financial Services’ as referred to in Schedule I of the NDI Rules, then the foreign investment in the company setting up WLA shall also comply with the minimum capitalisation norms, if any, for foreign investments in such ‘Other Financial Services’. Such foreign investments shall also be subject to the specific criteria and guidelines issued by the RBI under the Payment and Settlement Systems Act, 2007. 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.
Conclusion: A Step Towards Greater Efficiency and Flexibility
The Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 represent a considerable shift toward simplifying investment procedures and reducing regulatory burdens. By introducing more flexible mechanisms for cross-border equity swaps, ensuring consistency in key definitions, and streamlining FDI processes, these amendments align with the government’s vision of enhancing India’s competitiveness on the global stage. These changes are expected to boost India’s attractiveness as an investment destination, promote global expansion for Indian businesses by facilitating cross-border mergers and share swaps, and support economic growth through an improved regulatory environment for both domestic and foreign investors.
