The Ministry of Finance has, by way of Notification dated August 16, 2024, amended the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘FEMA NDI Rules’) with effect from the date of the Notification (‘Amendment’). The key changes brought about by the Amendment are:

i.    Primary and Secondary Swap: Prior to the Amendment, Indian companies were allowed to issue equity instruments to persons resident outside India, inter alia, against a swap of equity instruments in accordance with the conditions prescribed by the Central Government and/or the Reserve Bank of India (‘RBI’), provided that the Indian investee company was engaged in an automatic route sector. The FEMA NDI Rules did not permit a secondary transfer of equity instruments of an Indian company against a share swap and there was ambiguity as to whether a primary issuance was permitted against swap of securities of a non-Indian entity. Per the Amendment, the FEMA NDI Rules now permit Indian companies to issue equity instruments to a person resident outside India against swap of equity capital of a foreign company in compliance with the rules prescribed by the Central Government and the RBI. Further, the FEMA NDI Rules now also permit transfer of equity instruments of Indian companies between a person resident in India and a person resident outside India against swap of equity instruments issued by Indian or foreign companies;

ii.   WLA Operations: Prior to the Amendment, there was no provision in the FEMA NDI Rules with respect to companies engaged in White Label ATM (‘WLA’) operations, which is now expressly permitted pursuant to the Amendment, subject to the following conditionalities:

a. any non-banking entity intending to set up WLAs is required to have and maintain at all times, a minimum net worth of INR 100 crores (approx. USD 11.5 million) as per the audited balance sheet of the latest financial year;

b. if such entity intending to set up WLAs is also engaged in ‘Other Financial Services’ (as referred to in the FEMA NDI Rules), then the foreign investment in such entity is also required to comply with the minimum capitalization norms applicable for foreign investments in such ‘Other Financial Services’; and

c. foreign direct investment in a company engaged in WLA operations will be subject to the specific criteria and guidelines issued by the RBI under the Payment and Settlement Systems Act, 2007;

iii.  Cap on FPI Investments: Prior to the Amendment, the FEMA NDI Rules prescribed that the aggregate foreign portfolio investment (‘FPI’) up to 49% of the paid-up capital of an Indian company, or the applicable sectoral or statutory cap, whichever is lower, did not require Government approval or compliance with sectoral conditions, if such investment did not result in transfer of ownership and control of the resident Indian company: (a) from resident Indian citizens; or (b) to persons resident outside India. Pursuant to the Amendment, the investment limit of 49% by FPIs has been removed and has now been linked to the applicable sectoral or statutory cap. Other investments by a person resident outside India will continue to be subject to the conditions of Government approval and compliance with sectoral conditions as specified in the FEMA NDI Rules;

iv.   Investments by NRIs and OCIs: Prior to the Amendment, the FEMA NDI Rules provided that the investment made by an Indian entity which is owned and controlled by non-resident Indian(s) (‘NRI(s)’), on a non-repatriation basis, will not be considered for calculation of indirect foreign investment in an Indian company. The Amendment now clarifies that the same position applies to an investment made in an Indian company by an Indian entity which is owned and controlled by an NRI or an overseas citizen of India including a company, trust or partnership firm incorporated outside India which is owned and controlled by an NRI or an Overseas Citizen of India (‘OCI(s)’), on a non-repatriation basis; and

v. Definitions Aligned:

a. The definition of ‘control’ has been aligned with the primary legislations governing companies and limited liability partnerships in India; and

b. The definition of ‘startup’, which was previously defined under a Notification dated February 17, 2016 issued by the Department of Promotion of Industry and Internal Trade (‘DPIIT’), and modified by a subsequent Notification dated February 19, 2019, issued by the DPIIT has now been incorporated into the FEMA NDI Rules.