To promote ease of doing business for both domestic entities, in the international market, and foreign entities, in the domestic market, the Ministry of Finance has issued Foreign Exchange Management (Non-Debt Instrument) (Fourth Amendment) Rules, 2024 on 16th August 2024 permitting swap of equity instruments of Indian companies with equity instrument of foreign companies. In line with the same, RBI has also updated its master directions-Foreign Investment in India on 8th August 2024.

This article carries out an analysis of amendments given under the Foreign Exchange Management (NDI) Rules

1. Existing provisions on Swap of Equity Instruments

• As per Schedule I of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), An Indian company may issue equity instruments to a person resident outside India against:
  • swap of equity instruments;
  • Import of capital goods or machinery;
  • Pre-operative or pre-incorporation expense 
• Equity Instruments means equity shares, convertible debentures, preference shares, and shares warrants issued by an Indian Company.
• Therefore, Indian companies were not allowed to issue equity instruments to Non-resident against equity instruments of foreign companies without obtaining prior approval of the Reserve Bank of India.
• Therefore, non-residents not having equity instruments of Indian Companies can’t opt for swapping option

2. Amended Provisions on Swap of Equity Instruments

To promote ease of doing business between Indian Companies and foreign companies, the Following amendments are made to NDI Rules:

• Rule 9A has been inserted into the NDI Rules which permitted swap of equity instruments and equity capital.
• As per Rule 9A of NRI Rules, An Indian company is permitted to transfer equity instruments of an Indian Company to a person resident outside India against:
  • swap of equity instruments (i.e., of Indian Company)
  • swap of equity capital of a foreign company in compliance with Foreign Exchange Management, (Overseas Investment) Rules, 2022 (OI Rules)

• However, it is important to note that prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable.
• Similar amendments are made in Schedule I of NRI Rules.
• As per OI Rules, Equity capital means equity shares or perpetual capital or instruments that are irredeemable or contribute to non-debt capital of a foreign entity like fully and compulsorily convertible instruments.
• Therefore, any non-resident holding equity capital of a foreign company may swap the same with equity instruments of the Indian company subject to compliance with the provisions of OI Rules.
• E.g.
  • An Indian resident shareholder can acquire equity capital of a foreign company and in exchange can transfer the equity instrument of the Indian company to the foreign company.
  • An Indian Resident shareholder can acquire equity capital of a foreign company from a non-resident in exchange for equity shares of an Indian Company.
  • NRs holding equity capital in a foreign entity can acquire shares of an Indian subsidiary of such a foreign entity in exchange for such an Indian subsidiary acquiring shares of the foreign entity.

3. Approval by Foreign Portfolio Investors

• As per existing Para 3(1)(a) of Schedule I of NRI Rules, Aggregate foreign portfolio investment shall not require government approval or compliance of sectoral conditions up to lower of the following amounts:
  • 49% of the paid-up share capital on a fully diluted basis or
  • Sectoral or statutory cap

If such investment does not result in the transfer of ownership or control to a person resident outside India other investments by a person resident outside India shall be subject to the conditions of Government approval and compliance with sectoral conditions as laid down in these rules

• Through an amendment in NDI rules effective from 16.08.2024, the limit of 49% has been removed. Therefore, aggregate foreign portfolio investment up to the sectoral or statutory cap shall not require Government approval or compliance of sectoral conditions subject to other conditions provided such investment does not result in transfer of ownership and/ or control.

• E.g.

	Sectoral cap for FPI	Actual FPI	Whether Government approval is required or not
Before 16.08.2024	40%	48%	Government Approval is required
	75%	45%	No Government approval is required
	75%	50%	Government approval is required
After 16.08.2024	40%	48%	Government approval is required
	75%	45%	Government approval is not required
	75%	50%	Government approval is not required

• Before the amendment, an additional limit of 49% was also provided in addition to the sectoral cap. However, such a limit of 49% has been removed. Therefore, approval is required only if aggregate. foreign portfolio investment exceeds the sectoral cap.

4. Foreign investment in white-label ATM operations

• Amendment in NDI Rules has permitted 100% FDI in white label ATM operations (essentially ATMs of non-bank entities) under the automatic route subject to compliance with the following conditions:
  • any non-bank entity intending to set up white label ATMs should have a minimum net worth of INR 100 crores as per the latest financial year’s audited balance sheet, to be maintained at all times;
  • In case the Indian entity is also engaged in any ‘Other Financial Services’ as referred to in Schedule I of the Principal NDI Rules, then such foreign investment in the Indian entity setting up the white label ATMs shall also comply with the minimum capitalization norms, if any, for foreign investments in such ‘Other Financial Services’; and
  • Foreign direct investment in white-label ATM operations will be subject to specific criteria and guidelines issued by the RBI under the Payments and Settlements Systems Act, 2007.

• This amendment was already covered and provided for in the Consolidated FDI Policy 2020. The amendment has been made now to notify the amended rules

5. Conclusion

The Amendment is a welcome move by the industry as it smooths the investment process for both Indian and international players looking to optimize their investment and operations in India or abroad based on their requirements. The eased FDI-ODI swaps, relaxed FPI norms, and clarity on white-label ATM operations each indicate a move in the right direction.