Summary: The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 previously limited the issuance of Indian equity instruments to non-residents primarily for swaps involving other Indian securities. This framework required prior Reserve Bank of India (RBI) approval if the transaction included foreign securities. The Fourth Amendment Rules, 2024, introduced a significant change by adding Rule 9A. This new rule now allows Indian companies to issue equity instruments in exchange for the equity capital of a foreign company. This means a non-resident can now directly swap their holdings in a foreign company for equity in an Indian company, and vice-versa, without needing specific RBI permission for the swap itself. However, the transaction must still comply with existing rules for overseas investment and any sectoral caps or entry route conditions under the Foreign Direct Investment (FDI) policy, including a requirement for government approval in certain sensitive sectors. This amendment simplifies cross-border restructuring and investment opportunities while maintaining necessary regulatory safeguards.
Earlier Framework
Under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), Indian companies were permitted to issue their equity instruments to non-residents in limited cases, such as:
- by way of swap of equity instruments of another Indian company,
- against import of capital goods/machinery, or
- Towards pre-incorporation or pre-operative expenses.
The term equity instruments covered equity shares, convertible debentures, preference shares and share warrants of Indian companies.
Because of this narrow definition, a swap was effectively restricted to Indian securities alone. Where the transaction involved the securities of a foreign company, the approval of the Reserve Bank of India (RBI) became necessary. In other words, non-residents who held only foreign equity could not directly swap such holdings for Indian equity without obtaining prior RBI permission.
2024 Amendment – Key Changes
The Fourth Amendment Rules, 2024 (S.O. 3492(E), dated 16 August 2024) have made the following material changes:
Introduction of Rule 9A:
An Indian company’s equity instruments can now be transferred between a resident and a non-resident:
1. Against swap of equity instruments (Indian company securities),
OR
2. Against swap of equity capital of a foreign company, subject to compliance with:
Central Government rules (including Foreign Exchange Management (Overseas Investment) Rules, 2022), and RBI regulations issued from time to time.
- Proviso: Prior Government approval is still required in all cases where the FDI policy prescribes it (sensitive/approval-route sectors).
- Explanation: “Equity capital” shall have the meaning as under the OI Rules, 2022 – i.e., equity shares, perpetual capital, irredeemable instruments, or fully and compulsorily convertible non-debt capital contributions of a foreign entity.
Implications
- Indian ↔ Foreign Swap Enabled
Indian companies may now issue equity shares to non-residents in exchange for equity capital of a foreign entity, and vice versa. - Broader Coverage of “Foreign Entity”
Under the OI Rules, this extends beyond foreign companies to include LLCs, LLPs, investment funds and other limited liability entities incorporated outside India. - Regulatory Safeguards Remain:
- Transactions must comply with sectoral caps and entry routes under the FDI policy.
- ODI conditions apply to the Indian leg (e.g., bona fide business activity of foreign entity, layering restrictions, etc.).
- Reporting requirements with RBI/AD Banks continue.
- Prior approval route sectors still need government clearance.
Practical Illustrations
The amendment opens up several structuring opportunities:
- Indian shareholders may exchange their Indian company shares with equity capital of a foreign entity.
- Non-resident investors can swap their stake in a foreign company for equity shares in an Indian company.
- A foreign entity and its Indian subsidiary can swap shares with each other.
- Investment funds set up abroad can also utilise this route to reorganise or restructure their Indian portfolio investments.
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About the Author: The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closing businesses in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office in New Delhi.
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