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The Ministry of Finance (Department of Economic Affairs) has notified the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17 October 2019 (Principal Rules) in supersession of erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.

An Overview of Amendments

The Ministry of Finance has come out with amendment notification, i.e. Foreign Exchange Management (Non debt Instruments) (Second Amendment) Rules, 2020 S.O. 1374(E).dated 27th April, 2020, (Amended Rules) which inter-alia include:

  • Acquisition after renunciation of rights;
  • Applicability of sourcing norms on Single brand retail trading;
  • 100% investment under automatic route in Intermediaries or insurance intermediaries, subject conditions;
  • Divestment by foreign Portfolio Investor (FPI) under conditions as prescribed by SEBI.

An Insight

1. Acquisition by a person resident outside India (PROI) after renunciation of rights by other shareholder

Insertion of new rule 7A which inter-alia states that whenever a PROI acquired a right towards offered shares from a person resident in India (who has renounced it), may acquire equity instruments of an Indian Company (other than share warrants)by exercising such right subject to pricing guidelines specified under Principal Rules.

It is pertinent to state here that under the Principal Rules, there was an explanation to Rule 7 which laid down  that the conditions specified in Rule 7 are also applicable in case a non-resident made an investment in the equity instruments (other than share warrants) pursuant to exercise of right renounced by the person to whom it was offered. These conditions inter-alia states that:

  • Offer made by the India company should be compliance of the Companies Act, 2013, compliance of sectoral cap, as applicable,
  • the existing shares pursuant to which shares have been offered, should have issued in compliance Principal Rules,
  • pricing conditions for listed company as well unlisted company.

Now, the amendment rules has deleted the aforesaid explanation appended to Rule 7, and rule 7A has been inserted, resultant, non-resident can now subscribe to renounced shares in a rights issue, which have been renounced by a resident in its favour, subject to the pricing guidelines prescribed under the Principal Rules.

2. Applicability of sourcing norms on Single brand retail trading

Amendment in the Principal Rules, in Schedule 1, in the Table, which read as: Pursuant to the stated amendment the period from which the sourcing norm would become applicable would be 3 years from commencement of the first store or start of online retail, whichever is earlier.

In the Principal Rules, before the amendment, said period for applicability of sourcing norms was 3 years from the commencement of business which meant opening of the first store by such entity engaged in single brand retail trading of such products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible.

3. 100% FDI in Intermediaries or insurance intermediaries

In line with the 2019/20 budget presented on 5 July 2019 and amendment in Indian Insurance Companies (Foreign Investment) Rules, 2015, dated 2nd September 2019, limit of foreign direct investment in insurance intermediaries increased to 100% from previous limit of 49%, aligning with the budget and stated amendment, the Department of Economic Affairs has amended the Principal Rules. Accordingly, now the intermediaries or insurance intermediaries including insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors, loss assessors, and such other entities as may be notified by the Insurance Regulatory and Development Authority of India (IRDAI) would be eligible to receive 100% FDI under the automatic route subject to fulfilment of appended conditions.

Further to this if an insurance intermediary that has majority shareholding of foreign investors shall undertake the following:

  • be incorporated as a limited company under the provisions of the Companies Act, 2013;
  • at least one from among the Chairman of the Board of Directors or the Chief Executive Officer or Principal Officer or Managing Director of the insurance intermediary shall be a resident Indian citizen;
  • such insurance intermediaries are not permitted to make payments to a foreign group or promoter or subsidiary or interconnected or associate entities beyond the limits prescribed by the IRDAI.
  • the intermediaries are to make relevant disclosures in the prescribed format; and
  • they are required to bring in the latest technological, managerial and other skills.

4. Divestment by foreign Portfolio Investor (FPI), subject to further conditions as prescribed by SEBI

In case of breach of investment limits by an FPI, the divestment of holdings by the FPI and the reclassification of FPI investment as foreign direct investment shall be subject to further conditions, if any, specified by the Securities and Exchange Board of India and RBI, in this regard.

Key consideration:

Rule 7 itself state that price in case of rights issue to persons resident outside India shall be a price determined by the company and in case of an unlisted Indian company, it shall not be at a price less than the price offered to persons resident in India, however, by virtue of Rule 7A bringing additional pricing condition as specified under rule 21 applicable on acquisition of shares by exercising the renounced right , there would be duel pricing provisions applicable.

Further, this notification has been issued by Department of Economic Affairs with an intent to ensure ease of doing business, however, compliance of numerous additional conditions by insurance intermediary in case it has majority shareholding of foreign investors (foreign owned and control entity). Also, unwanted restrictions on payments to be made to related parties, repatriation of dividends, board composition etc. on such insurance intermediary would deteriorating frequent FDI in such entities.  

This Article has been Compiled by Deepika Sharma  (Senior Associate)


The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.


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April 2024