Key Amendments to India’s Foreign Investment Regulations: Simplifying Cross-Border Transactions and Enhancing Investor Confidence 

This Article has been authored by Suman Kumar Jha (Founder & Managing Partner), Afnaan Siddiqui (Co-founder & Partner), Visakha Raghuram (Associate) and Bharat

Introduction  

The Ministry of Finance in India introduced significant amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) through the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 released on August 16, 2024. These changes aim to simplify and clarify India’s foreign investment regulations, aligning with the government’s vision to create a more investor-friendly environment and enhance India’s appeal as a global investment hub. This post examines the key amendments and their potential impact on foreign investment in India. 

Overview of the changes 

1. Cross-Border Share Swaps: The amendments introduce Rule 9A, which allows for the transfer of equity instruments between Indian and foreign entities through share swaps. This applies to both primary issuances and secondary transfers. Previously, only primary issuances were explicitly permitted, and secondary transfers required RBI approval.  

1. Downstream Investments by OCI-owned Entities: The amendments clarify that investments made by entities owned and controlled by OCIs on a non-repatriation basis will not be considered for calculating indirect foreign investment. This aligns the treatment of OCI-owned entities with NRI-owned entities, potentially encouraging more investment from OCIs. 

1. Definition of “Control”: The definition of “control” has been standardized to align with the Companies Act, 2013. For companies, it now includes the right to appoint a majority of directors or control management/policy decisions. For LLPs, it remains the right to appoint a majority of designated partners.  

1. Definition of “Startup”: The definition of “startup” has been updated to align with the DPIIT’s 2019 notification. Key changes include extending the incorporation period from 5 to 10 years and increasing the turnover threshold from INR 25 crore to INR 100 crore.  

1. FDI in White Label ATM Operations: The amendments permit 100% FDI in White Label ATM Operations under the automatic route, aligning with the Consolidated FDI Policy of 2020. 

1. Government Approval for Equity Transfers: The amendments clarify that government approval is required for all transfers of equity instruments involving non-residents, whenever applicable.  

1. Foreign Portfolio Investment (FPI): The amendments clarify that aggregate FPI up to the sectoral cap will not require government approval or compliance with sectoral conditions, provided it doesn’t result in transfer of ownership or control.  

Analysis  

The recent amendments to India’s foreign investment regulations bring about several key changes aimed at simplifying and modernizing the regulatory landscape. A cornerstone of these changes is the introduction of Rule 9A, which facilitates equity instrument transfers between Indian and foreign entities through share swaps. This provision extends to both primary issuances and secondary transfers, marking a significant departure from the previous framework where secondary transfers necessitated RBI approval. This modification is poised to streamline cross-border mergers and acquisitions, offering enhanced flexibility in deal structuring and potentially catalysing increased foreign investment inflows. 

In a move to equalize treatment of diaspora investors, the amendments address investments made by entities under Overseas Citizens of India (OCI) ownership and control. When such investments are made on a non-repatriation basis, they will be excluded from indirect foreign investment calculations. We believe that this alignment with the treatment of NRI-owned entities is expected to incentivize OCI investments and simplify regulatory compliance for these investors. 

The amendments also bring definitional clarity to key terms. The concept of “control” has been standardized to align with the Companies Act, 2013, encompassing the right to appoint a majority of directors or influence management decisions for companies, while maintaining the existing definition for LLPs. This move reduces ambiguity and eases compliance burdens for investors. 

Supporting India’s burgeoning startup ecosystem, the amendments revise the definition of “startup” to mirror the DPIIT’s 2019 notification. The changes extend the incorporation period to 10 years and raise the turnover threshold to INR 100 crore, effectively broadening the startup classification and potentially attracting more foreign investment to this dynamic sector. 

The regulatory framework for White Label ATM Operations has also been liberalized, with 100% FDI now permitted under the automatic route. This change, aligning with the Consolidated FDI Policy of 2020, is expected to boost financial inclusion by encouraging investment in ATM infrastructure, particularly in underserved areas. 

Lastly, the amendments provide clarity on Foreign Portfolio Investment (FPI), stipulating that aggregate FPI up to the sectoral cap will not require government approval or adherence to sectoral conditions, provided it does not result in ownership or control transfer. This simplification of the FPI process is likely to encourage greater portfolio investment in Indian companies. 

Collectively, these amendments represent a significant stride towards creating a more investor-friendly environment in India. By simplifying processes, clarifying definitions, and aligning regulations across different investor categories, these changes aim to enhance India’s attractiveness as a global investment destination while supporting key economic objectives such as startup growth and financial inclusion.