Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022

MINISTRY OF FINANCE

(Department of Economic Affairs)

New Delhi, the 12th April, 2022

S.O. 1802(E).—In exercise of the powers conferred by clauses (aa) and (ab) of sub-section (2) of section 46 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Central Government hereby makes the following rules further to amend the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, namely:

1. Short title and commencement. — (1) These rules may be called the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (hereinafter referred to as the said rules), in rule 2,-

(i) in clause (e), for the words “five years”, the words “ten years” shall be substituted ;

(ii) in clause (k), in the Explanation, for clause (i), the following clause shall be substituted, namely:-

“(i) Equity shares issued by an Indian Company in accordance with the provisions of the Companies Act, 2013 or any other applicable law, shall include equity shares that have been partly paid. “Convertible debentures” means fully and mandatorily convertible debentures which are fully paid. “Preference shares” means fully and mandatorily convertible preference shares which are fully paid. “Share Warrants” are those issued by an Indian Company in accordance with the regulations made by the Securities and Exchange Board of India, the Companies Act, 2013 or any other applicable law. Equity instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.”;

(iii) in clause (s), for the Explanation, the following Explanation shall be substituted, namely:-

“Explanation: – If a declaration is made by a person as per the provisions of the Companies Act, 2013 or any other applicable law, as the case may be, about a beneficial interest being held by a person resident outside India, then even though the investment may be made by a resident Indian citizen, the same shall be counted as foreign investment;”;

(iv) for clause (y), the following clause shall be substituted, namely:-

“ (y) “Indian company” means a company as defined in the Companies Act, 2013 or a body corporate established or constituted by or under any Central or State Act, which is incorporated in India;

Note:

(i) It is clarified that reference to ‘company’ or ‘investee company’ or ‘transferee company’ or ‘transferor company’ in these rules also includes a reference to a body corporate established or constituted by or under any Central or State Act.

(ii) It is further clarified that if the term ‘Company ‘ or ‘Indian company’ or ‘Investee company’ or ‘transferee company’ or ‘transferor company’ is qualified by a reference to a company incorporated under the Companies Act, 2013 such term shall mean a company incorporated under the said Act but not a body corporate.

(iii) It is also clarified that ‘Indian company’ does not include a society, trust or any entity, which is excluded as an eligible investee entity under the FDI Policy.”;

(v) after clause (am), the following clause shall be inserted, namely :-

“(ama) “Share Based Employee Benefits” means issue of equity instruments to employees or directors or employees or directors of the holding company or joint venture or wholly owned overseas subsidiary or subsidiaries who are resident outside India, pursuant to Share Based Employee Benefits schemes formulated by an Indian Company”;

(vi) after clause (an), the following clause shall be inserted, namely :-

“(ana) “subsidiary” shall have the same meaning as is assigned to it in the Companies Act, 2013, as amended from time to time”;

3. In the said rules, for rule 8, the following rule shall be substituted, namely:-

“8. Issue of Employees Stock Options , sweat equity shares and Share Based Employee Benefits to persons resident outside India.- An Indian company may issue “employees’ stock option”, “sweat equity shares”, and “Share Based Employee Benefits” to its employees or directors or employees or directors of its holding company or joint venture or wholly owned overseas subsidiary or subsidiaries who are resident outside India:

Provided that. –

(a) the scheme has been drawn either in terms of regulations issued under the Securities and Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 or as per other applicable law, as the case may be;

(b) the “employee’s stock option” or “sweat equity shares” or “Share Based Employee Benefits” so issued under the applicable rules or regulations are in compliance with the sectoral cap applicable to the said company;

(c) the issue of “employee’s stock option” or “sweat equity shares” or “Share Based Employee Benefits” in a company where foreign investment is under the approval route shall require prior government approval;

(d) issue of “employee’s stock option” or “sweat equity shares” or “Share Based Employee Benefits” to a citizen of Bangladesh or Pakistan shall require prior government approval :

Provided further that an individual who is a person resident outside India exercising an option which was issued when he or she was a person resident in India shall hold the shares so acquired on exercising the option on a non-repatriation basis.”.

4. In the said rules, in rule 19,

(i) for sub-rule (1), the following sub-rule shall be substituted, namely:-

“ (1) Where a scheme of compromise or arrangement or merger or amalgamation of two or more Indian companies or a reconstruction by way of demerger or otherwise of an Indian company, or transfer of undertaking of one or more Indian company to another Indian company, or involving division of one or more Indian company, has been approved by the National Company Law Tribunal (NCLT) or other authority competent to do so by law, the transferee company or the new company, as the case may be, may issue equity instruments to the existing shareholders of the transferor company resident outside India, subject to the following conditions, namely:-

(a) the transfer or issue is in compliance with the entry routes, sectoral caps or investment limits, as the case may be and the attendant conditionalities of investment by a person resident outside India :

Provided that where the percentage is likely to breach the sectoral caps or the attendant conditionalities, the transferor company or the transferee or new company may obtain necessary approval from the Central Government;

(b) the transferor company or the transferee company or the new company is not engaged in any sector prohibited for investment by a person resident outside India.

Note: Government approval shall not be required in case of mergers and acquisitions taking place in sectors under automatic route.”;

(ii) in sub-rule (2), after the words “where a scheme of”, the words “compromise or arrangement or” shall be inserted.

5. In the said rules, in Schedule I,

(i) in paragraph 2, in sub-paragraph (f), for the Explanation, the following Explanation shall be substituted, namely:-

“Explanation: For the purpose of this rule, ‘real estate business’ means dealing in land and immovable property with a view to earning profit from there and does not include development of townships, construction of residential or commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships, real estate broking services and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014 and earning of rent or income on lease of the property, not amounting to transfer.;

(ii) in the Table,-

(a) under the heading Insurance,

(A) after Sl. No. F.8.1, the following Sl. No. and entries shall be inserted, namely:-

(B) for Sl. No. “F.8.3” and the entry under column 2, the following Sl. No. and entry shall respectively be substituted, namely :-

(C) For clause (k), the following clause shall be substituted, namely :-

“(k) Terms “Equity Share Capital”, ‟Foreign Direct Investment” (FDI), “Foreign Investors”, ‟Foreign Portfolio Investment”, “Indian Insurance Company”, ‟Indian Company”, “Non-resident Entity”, “Public Financial Institution”, “Resident Indian Citizen” and “Total Foreign Investment” shall have the same meaning as specified in the rules under the Insurance Act, 1938 or in the regulations issued by Insurance Regulatory and Development Authority of India from time to time, in respect of foreign investment in Indian Insurance Companies and intermediaries or insurance intermediaries.”;

(D) after Sl No. F.8.3.1, the following Sl.No. and entries relating thereto shall be inserted, namely :-

[F. No. 01/05/EM/2019]

ANAND MOHAN BAJAJ, Addl. Secy.

Note: The principal rules were published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number  S.O.3732 (E), dated the 17th October, 2019 and subsequently amended vide notification numbers: –

(i) S.O. 4355 (E), dated the 5th December 2019,

(ii) S.O. 1278 (E), dated the 22nd April, 2020,

(iii) S.O. 1374 (E), dated the 27th April, 2020,

(iv) S.O. 2442 (E), dated the 27th July, 2020,

(v) S.O. 4441 (E), dated the 8th December, 2020,

(vi)  S.O. 3206 (E), dated the 6th August, 2021,

(vii) S.O. 3411 (E), dated the 19th August, 2021

(viii) S.O. 4091 (E), dated the 5th October 2021 and

(ix) S.O. 4242 (E), dated the 12th October 2021