FEMA

India Amends FEMA NDI Rules for Cross-Border Share Swaps

The recent amendments to the Foreign Exchange Management (Non-debt Instrument) Rules, 2019 (FEMA NDI Rules), have introduced significant changes affecting foreign direct investments, including revised caps on sectoral investment limits, updated compliance requirements for foreign investors and streamlined procedures for reporting and approvals.

It paves the way for the cross-border share swap in the latest addition to the country’s FDI policy. These amendments were introduced by the Ministry of Finance on August 16, 2024, aimed at making India more attractive for foreign investors by simplifying the rules and their harmonization with global standards. The implications of these amendments, particularly for businesses and investors on the lookout to capitalize on India’s growing market.

Ensure smooth cross-border share swaps with FEMA Registration to secure your investments in India with streamlined compliance under the updated FEMA NDI Rules.

Simplification of Cross-Border Share Swaps

The most radical changes include the abolition of prior approval from the Reserve Bank of India in the case of cross-border share swaps. Before this Amendment, an Indian company had to go through a tedious approval process from the RBI for the issue or transfer of equity instead of foreign equity capital. It will enable companies to conduct such transactions faster and facilitate mergers, acquisitions, and other strategic international tie-ups.

It is particularly important to Indian companies looking to go global. Such reform reduces regulatory friction, enables quicker decision-making and execution in cross-border transactions, and thus helps businesses grab opportunities more effectively. It can be a game-changer in industries such as technology, pharmaceuticals, and manufacturing, in which swift expansion and access to new markets are significant elements for remaining competitive.

Clarification and Harmonization of Key Definitions

These amendments have also introduced unambiguous definitions for “control” and “startup company” to fit within other legal frameworks, such as the Companies Act 2013.

Control

The revised definition of control now encompasses the appointment of a majority of the directors and influence over key direct or indirect decisions. It clarifies to investors the quantum of influence they can have on Indian companies, thereby helping reduce possible legal ambiguities.

Startup Company

Startup Company is a private company incorporated under the Department for Promotion of Industry and Internal Trade (DPIIT). Such harmonization would make the regulatory regime easier to negotiate, especially for startups aimed at foreign investment.

These definitions are legal and have practical implications for structuring businesses and managing investments. Clarity is, therefore, essential to foreign investors looking to make good investment decisions, primarily when investing in high-growth startups.

Effect on Downstream Investments by NRIs and OCIs

Another significant Amendment is the treatment given to downstream investments made by Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). Before this, any investment made by an Indian company owned or controlled by an NRI on a non-repatriation basis was not considered a foreign investment. However, the new rules also extend this exception to include investments made by entities incorporated outside India but owned or controlled by NRIs or OCIs.

This modification simplifies compliance requirements and thus encourages more investment from the Indian diaspora. This amendment reduces the regulatory burden on NRIs and OCIs since these investments are not classified as foreign ones, thereby making it easier for them to contribute to the growth of India’s economy.

Sectors such as real estate and technology have particularly been important in this aspect, where there has been much interest from NRIs and OCIs.

Navigate the new FEMA rules with ease and boost your investment opportunities by maintaining compliance under FEMA  which ensures seamless integration of downstream investments by NRIs and OCIs into India’s thriving sectors.

Boost Financial Inclusion with 100% FDI in White Label ATM Operations

The amendment allows 100% foreign direct investment in White Label ATM Operations under the automatic route, subject to certain conditions. FDI under automatic route is a great option. This is just one of the strategies that the government is implementing in its efforts for financial inclusion within India by increasing the number of ATMs in underserved areas, particularly those found in rural and semi-urban regions that do not have any such facility.

To obtain 100% FDI under the automatic route, a non-bank entity setting up WLAOs should have a minimum net worth of rupees 1 billion, as per the latest audited financial statements. This condition has been put in place so that only financially sound companies can be permitted to operate their businesses and protect consumers’ interests, which goes with maintaining stability in the financial system.

Also, Other Financial Services entities wishing to set up WLAOs must comply with existing capitalization requirements laid down by relevant regulators. In addition, all FDI inflows into WLAOs must meet guidelines issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007.

This amendment will likely lead to huge foreign investments in the financial services sector, mainly among firms with ATM operations, Fintech, and financial infrastructure skills. Through the Automatic Route with 100% FDI,

Aggregation of Foreign Portfolio Investment

The amendment also clarifies the issue related to the aggregation of foreign portfolio investments. Under the previous regulation, there was a threshold limit for FPI aggregation: 49% of the paid-up capital or the sectoral/statutory cap, whichever was lower. It acted as a barrier if foreign portfolio investors desired to make bigger investments, especially in sectors with higher statutory caps.

The new amendment removes this threshold, and as a result, foreign portfolio investment up to the sectoral or statutory cap is now on automatic route without the government approval, however, with the pre-condition that such investment will not lead to a change in ownership or control of the resident Indian company.

This further simplifies the regulatory process and encourages more foreign portfolio investment into Indian companies, especially in fast-growing sectors. The Indian government, through the removal of the threshold of aggregation, is going to make things easier for foreign portfolio investors who may wish to invest in Indian companies. Thereby helping to boost liquidity in the market and supporting more growth within the Indian economy.

 It will help the country attract more foreign portfolio investment in areas where it enjoys a competitive advantage, such as technology, pharmaceuticals, and manufacturing.

Conclusion

The recent amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, form part of the significant changes that India has been gearing up for, which is a business-friendly economy. By harmonizing the definitions and simplifying the cross-border swap of shares, the Indian government opens a few more doors to international investors by allowing 100% FDI in specific sectors of importance.

Overall, changes in amendments to the FEMA NDI Rules represent the strategic move by the Indian government in laying down its regulatory framework to global best practices. This could ensure ease for domestic and international investors to do business in the country on par with global practices and be a part of a larger perspective in the country’s economic growth narrative.

With the amendments to FEMA NDI Rules, India will attract the most foreign investment, shaping into a bright and blooming future.

Streamline your cross-border share swaps by visiting our website to www.enterslice.com  secure your global business expansion with us today.