Ministry of Finance Amends FDI Non – Debt Instruments

Introduction

Through a notification[1] dated 16th August 2024, the Ministry of Finance via Department of Economic Affairs has relaxed foreign investment rules that have allowed cross border transactions  including border share swaps and foreign direct investment in White Label ATM operations that have mandated the procurement of government approval for the transfer of equity instruments between persons residing outside India, along with synchronizing the definitions of ‘control’ and ‘start – up’ and various other terms.

The Central Government has also brought in amendments to the Foreign Exchange Management (Non – Debt Instruments) Rules, 2019 (NDI Rules) in order to create a more favourable ecosystem for foreign investors in India through the notification of the Fourth Amendment Rules 2024.

Landmark Changes

There are various landmark changes that have been brought in by the Amendment Rules which are as follows: –

1. Permitting Cross Border Swap of Equity Instruments- the Amendment rules have permitted the transfer of equity instruments concerning an Indian company between an individual resident of India and a person resident outside India (NR) through the way of swap of equity instruments or equity capital of a foreign company in compliance with the rules and regulations that have been prescribed by the central government and the Reserve Bank of India.

   These swaps have been permitted in cases wherein the government’s approval is applicable provided such prior approval of the government has been obtained. This amendment has also aimed to specify cross – border share swapping and permitted the issuance or the transfer of the equity instruments of an Indian company in exchange of any foreign company’s equity instruments. Through this amendment, expansion of Indian markets including companies through mergers, acquisitions and other strategic initiatives shall be facilitated which shall enable it to reach new markets and grow their presence internationally.

b. Permitting Foreign Direct Investment in White Label ATM Operations- White Label ATMs are those ATMs that have been set-up, owned and operated by the non – banking companies of India and are authorised by the Payment and Settlement Systems Act, 2007 (PSS Act) by the Reserve Bank. With the objective of fostering financial inclusion across the country, the amendment rules have permitted 100% FDI in white label ATM operations through an automatic route subject to the following conditions:

1. Any non banking entity that intends to setup White Label ATMs (WLA) should have a minimum net worth of INR 1,000,000,000 as per the latest Financial year’s audited balance sheet which shall be maintained constantly.
2. In case there is an entity which is engaged in any other financial services, the foreign investment in the company setting up the WLA shall also have to comply with the minimum norms for capitalisation for foreign investments in any such other financial services.

c. Approval for government for transfer of equity instruments between persons residing outside India- Prior to the amendment rules coming into effect, the approval of the government was required to be obtained for transferring the equity instruments of an Indian company from a Non – Resident to another. The amended rules have now prescribed that a prior government approval shall only be required to be obtained for transfer of equity instruments of an Indian company from NR to another NR in all cases, wherever government approval is applicable.

d. No government approval for Foreign Portfolio Investments up to the sectoral cap- the amended rules have also prescribed that the aggregate Foreign Portfolio investments up to the sectoral or statutory cap shall not be required to obtain government approval or compliance with the sectoral norms in case such investments do not result in the transferring of ownership or control of the resident Indian company from resident Indian citizens to non – residents. This amendment has successfully replaced the erstwhile requirement under the NDI rules which have mandated the compliance with 49% cap of the paid – up capital of the resident Indian company on a fully – diluted basis or the sectoral or statutory cap whichever is lower.

Implications

The present amendment by the Ministry of Finance shall have wide implications upon the economic setup of India. First of all, the amendment has aimed to simplify the cross – border swapping of shares or transfer of equity of an Indian company in exchange of foreign equity instruments in order to facilitate the expansion of Indian companies at a global level through the process of mergers, acquisitions and various other strategic initiatives which shall enable them to reach greater market share and grow their presence worldwide.

Secondly, the amendment has also provided for numerous options in structuring cross border deals in mergers and acquisition transactions which shall allow the parties to prepare better structures for considerations especially in deals wherein the acquirer can improve performance of company or market conditions. Moreover prior to the amendment, share swaps were allowed only in cases of persons residing outside India which are in the automatic sector but the amendment has also updated the same.

The reforms in the FDI norms shall also attract more foreign investments through which Indian companies can pursue mergers and acquisitions easily to increase global presence as well as extend the benefit to companies, trusts, partnerships incorporated outside India and which are owned and controlled by NRIs and OCIs. 

Conclusion

The present amendment has highlighted the central government’s dedication towards fostering a business environment which is welcoming to foreign investors by regularly working towards reforms which shall improve ease of doing business in the country. Additionally, this step has also reduced the compliance and regulation burden with the entities operating outside India by making it simpler for them to invest and operate in the country.

Overall, this step would result in significant reforms in the economic and corporate sector across the country.

[1] https://static.pib.gov.in/WriteReadData/specificdocs/documents/2024/aug/doc2024816377701.pdf

King Stubb & Kasiva,
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