The Finance Ministry has issued a notification regarding the transfer of equity instruments between residents of India and foreign residents, introducing key amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
This amendment, known as the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024, shall come into force on the date of their publication in the Official Gazette, that is 16th August 2024. It also added a provision w.r.t. White Label ATM Operations (WLAO).
One significant change is the introduction of a new rule, Rule 9A, which details the conditions under which equity instruments of an Indian company can be transferred between residents and non-residents. The amendment is as follows:
“9A. Swap of equity instruments and equity capital
“The transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India may be by way of––
(i) swap of equity instruments, in compliance with the rules prescribed by the Central Government and the regulations specified by the Reserve Bank from time to time;
(ii) swap of equity capital of a foreign company in compliance with the rules prescribed by the Central Government including the Foreign Exchange Management, (Overseas Investment) Rules, 2022, and the regulations specified by the Reserve Bank from time to time: Provided that prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable.”
Explanation. – For the purposes of this clause, the expression “equity capital” shall have the same meaning as assigned to it in the Foreign Exchange Management, (Overseas Investment) Rules, 2022, as amended from time to time.’’.
Furthermore, in the sub-clause (i) for the explanation of Rule 23(7), the amendments clarified that certain investments made by Indian entities owned and controlled by Non-Resident Indians or Overseas Citizens of India on a non-repatriation basis will not be counted as indirect foreign investments.
The notification also updates provisions related to the issuance of equity instruments to non-residents, the import of capital goods, and the pre-incorporation expenses, with a focus on compliance with the latest regulatory requirements.
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The amendments introduced a definition of “control” in line with the Companies Act, 2013, and provide guidelines for Limited Liability Partnerships (LLPs). Additionally, the definition of a “startup company” has been updated to align with the latest government notifications.
Further, in paragraph (3), in clause (a), for sub-clause (iii), the following sub-clause shall be substituted, namely: –
“(iii) The aggregate foreign portfolio investment up to the sectoral or statutory cap shall not require Government approval or compliance of sectoral conditions as the case may be, if such investment does not result in transfer of ownership and/ or control of the resident Indian company from resident Indian citizens to persons resident outside India and other investments by a person resident outside India shall be subject to the conditions of Government approval and compliance of sectoral conditions as laid down in these rules.”;
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The principal rules have been updated with key changes to Schedule II and Schedule VII. In Schedule II, under paragraph (1), sub-paragraph (a), clause (ii), the explanation has been revised.
The new explanation states that if two or more Foreign Portfolio Investors (FPIs), including foreign governments or their related entities, share common ownership (directly or indirectly) of more than fifty percent or have common control, they will be considered part of the same investor group.
In Schedule VII, under paragraph (1), sub-paragraph (iii), a new provision has been introduced. It states that equity or equity-linked instruments or debt instruments issued by an Indian startup company can be invested in, regardless of the sector in which the startup is engaged. However, if the investment is in equity instruments, sectoral caps, entry routes, and applicable conditions must be adhered to.
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