Summary: Foreign Exchange Management Non debt Instruments Fourth Amendment Rules 2024, introduces several significant changes to Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Rule 2(da) standardizes the definition of “control” by aligning it with the Companies Act, 2013. Rule 2(an) updates the definition of a “startup company” to align with the 2019 DPIIT notification, refining criteria for what constitutes a startup. Rule 9(1)(i) now mandates government approval for all equity transfers involving foreign residents, broadening the scope from sector-specific approvals. Rule 9A introduces provisions for the swap of equity instruments between Indian and foreign entities, facilitating cross-border transactions. Rule 23(7)(d) is omitted as the definition of “control” is now consolidated under Rule 2(da). Rule 23(7)(i) clarifies that investments by NRIs on a non-repatriation basis will be considered domestic, aligning with DPIIT guidelines. Schedule I updates include allowing equity issuance against foreign equity capital swaps and eliminating sector-specific approval requirements. Schedule I also revises foreign portfolio investment limits and includes provisions for White Label ATM operations, which can now attract foreign investment. Lastly, the definition of “startup” in Schedule VII is updated to match the recent DPIIT notification, ensuring consistency across regulations.
| Sr. No. | Rules | Original Provision | Amended Provision | Analysis |
| 1.
|
Rule 2 (da) inserted | – | Insertion Rule 2 – ‘(da) “control” shall have the same meaning as assigned to it in the Companies Act, 2013 and for the purposes of Limited Liability Partnership, shall mean the right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP;’ | Standardizing the definition of ‘control’ to be in accordance with the Companies Act, 2013 and LLP Act. |
| 2. | Rule 2(an) amended | Rule 2 (an) “startup company” means a private company incorporated under the Companies Act, 2013 and identified under G.S.R. 180(E), dated the 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. | “startup company” means a private company incorporated under the Companies Act, 2013 (18 of 2013) and identified as “startup” under the notification of the Government of India number G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, as amended from time to time;” | Harmonises the definition of startup company in accordance with the 2019 notification of the DPIIT. According to the 2019 notification, an entity is considered as a startup-
– Upto a period of 10 years from the date of incorporation/ registration, if it is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership. – Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees. – Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’. Reference- Notification No. G.S.R. 127(E)., Dated: 19th February, 2019 |
| 3. | Rule 9(1)(i) amended | Rule 9(1) Transfer of equity instruments of an Indian company by or to a person resident outside India by way of sale or gift would require-
(i) – prior government approval shall be obtained for any transfer in case the company is engaged in a sector which requires government approval. |
prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable. | The transfer of equity instruments of an Indian company by a person resident outside India by way of sale or gift required government approval in case the company was engaged in the sector which required government approval.
However the amendment now requires the person resident outside India to obtain government approval in all the cases and not just the sector wise approval as was initially required. |
| 4. | Rule 9A inserted | – | Insertion 9A – “9A. Swap of equity instruments and equity capital. –– The transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India may be by way of––
(i) swap of equity instruments, in compliance with the rules prescribed by the Central Government and the regulations specified by the Reserve Bank from time to time; (ii) swap of equity capital of a foreign company in compliance with the rules prescribed by the Central Government including the Foreign Exchange Management, (Overseas Investment) Rules, 2022, and the regulations specified by the Reserve Bank from time to time: Provided that prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable. Explanation. – For the purposes of this clause, the expression “equity capital” shall have the same meaning as assigned to it in the Foreign Exchange Management, (Overseas Investment) Rules, 2022, as amended from time to time.’’. |
There were no provision in the NDI Rules which permitted the swap of equity instruments meaning transfer of equity instrument (equity shares etc) of an Indian company by a person resident in India to a foreign company in exchange of equity instruments of a foreign company. Therefore previously, such transactions required RBI approval.
However after this amendment, such transfers are possible i.e Swap of equity instruments and equity capital subject to government approval. This aims at simplifying the cross- border swap of equity instruments which would enable the global expansion of Indian companies to reach new markets. |
| 5. | Rule 23(7)(d) omitted | Rule 23(7)(d) – (d) “control” shall mean the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreement and for the purpose of LLP, “control” shall mean the right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP. | Omitted | A new definition in compliance with the Companies act is added in the definitions in Rule 2(da). |
| 6. | Rule 23(7)(i) explanation inserted | – | An investment made by an Indian entity which is owned and controlled by a Non-Resident Indian or an Overseas Citizen of India including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a Non-Resident Indian or an Overseas Citizen of India, on a non repatriation basis in compliance with Schedule IV of these rules, shall not be considered for calculation of indirect foreign investment. | According to the DPIIT Press Note 1 of 2021, it was clarified that Investments by NRl(s) on non-repatriation basis are deemed to be domestic investments at par with the investments made by residents. Accordingly, an investment made by an Indian entity which is owned and controlled by NRl(s) on a non-repatriation basis shall not be considered for calculation of indirect foreign investment.
Therefore, the amendment is to align with the notification of the DPIIT regarding the treatment of investment by NRIs and OCI as domestic investment. Reference- Press Note No. 1 (2021 Series) |
| 7. | Schedule I (1)(d) amended | Schedule I(1) – (d) An Indian company may issue, subject to compliance with the conditions prescribed by the Central Government and/or the Reserve Bank from time to time, equity instruments to a person resident outside India, if the Indian investee company is engaged in an automatic route sector, against,- (i) swap of equity instruments; or (ii) import of capital goods or machinery or equipment (excluding second-hand machinery); or (iii) pre-operative or pre-incorporation expenses (including payments of rent etc.) : Provided that the Government approval shall be obtained if the Indian investee company is engaged in a sector under Government route and the applications for approval shall be made in the manner prescribed by the Central Government from time to time. | An Indian company may issue, subject to compliance with the rules prescribed by the Central Government and the regulations specified by the Reserve Bank from time to time, equity instruments to a person resident outside India against, – (i) swap of equity instruments; or (ii) import of capital goods or machinery or equipment (excluding second hand machinery); or (iii) pre-operative or pre-incorporation expenses (including payments of rent, etc.); (iv) swap of equity capital of a foreign company in compliance with the rules prescribed by the Central Government including Foreign Exchange Management, (Overseas Investment) Rules 2022, and the regulations specified by the Reserve Bank from time to time. Explanation. – For the purposes of this clause, the expression “equity capital” shall have the same meaning as assigned to it in the Foreign Exchange Management, (Overseas Investment) Rules, 2022, as amended from time to time: Provided that Government approval shall be obtained in all cases wherever Government approval is applicable and the applications for approval shall be made in the manner prescribed by the Central Government from time to time. | Previously, the Indian company could not issue equity instrument against swap of equity capital. However, the amendment now includes issuance of equity instruments against swap of equity capital of a foreign company by an Indian Company to a person resident outside India.
Moreover, the condition that government approval would only be mandatory if the Indian investee company is engaged in the sector under government route is done away with. Therefore, after the amendment there is no bifurcation for obtaining government approval, meaning that for issuance of equity instrument under this Para, government approval would be required in all cases whether the Indian Investee company is engaged in automatic route or government route. |
| 8. | Schedule I (3)(a)(iii) amended | Schedule I(3) – (iii) Aggregate foreign portfolio investment up to forty-nine percent of the paid-up capital on a fully diluted basis or the sectoral or statutory cap, whichever is lower, shall not require Government approval or compliance of sectoral conditions as the case may be, if such investment does not result in transfer of ownership and control of the resident Indian company from resident Indian citizens or transfer of ownership or control to persons resident outside India and other investments by a person resident outside India shall be subject to the conditions of Government approval and compliance of sectoral conditions as laid down in these rules. | The aggregate foreign portfolio investment up to the sectoral or statutory cap shall not require Government approval or compliance of sectoral conditions as the case may be, if such investment does not result in transfer of ownership and/ or control of the resident Indian company from resident Indian citizens to persons resident outside India and other investments by a person resident outside India shall be subject to the conditions of Government approval and compliance of sectoral conditions as laid down in these rules. | The limit of Aggregate Foreign Portfolio investment upto 49% of the paid up capital on a fully diluted basis is done away with.
Therefore the amendment now mandates that the AFP investments upto the statutory cap shall not require Government approval if control and ownership of the Indian company has not been transferred to a person resident outside India. |
| 9. | Insertion of SL. No. F. 11- White Label ATM operations | – | Insertion – Schedule 1(3) – White Label ATM Operations with Sectoral Cap of 100%, Automatic Route.
Other conditions- Any non-bank entity intending to set up White Label ATMs (WLAs) should have a minimum net worth of one hundred crore rupees as per the latest financial year’s audited balance sheet, to be maintained at all times. (b) In case the entity is also engaged in any ‘Other Financial Services’ referred to in Sl. No. F.10 above, then the foreign investment in the company setting up WLA shall also comply with the minimum capitalisation norms, if any, for foreign investments in such ‘Other Financial Services’. (c) FDI in the WLAO will be subject to the specific criteria and guidelines issued by the Reserve Bank under the Payment and Settlement Systems Act, 2007 (51 of 2007).”. |
Inclusion of White Label ATM operation invites foreign investments and aims at boosting financial inclusion nationwide. |
| 10. | Schedule II. (1)(a)(ii) explanation amended. | Schedule II (1)(a)(ii) – Explanation: In case, two or more FPI’s including foreign Governments/their related entities are having common ownership, directly or indirectly, of more than fifty percent or common control, all such FPI’s shall be treated as forming part of an investor group. Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner. | Explanation, – In case two or more FPI’s including foreign Governments or their related entities are having common ownership, directly or indirectly, of more than fifty percent or common control, all such FPI’s shall be treated as forming part of an investor group. | Removed the meaning of ‘control’ as inserted in the definitions in Rule 2 (da) which is in compliance with other laws and acts. |
| 11. | Schedule VII. (1)(iii) amended | Schedule VII (1)(iii) – equity or equity linked instrument or debt instrument issued by an Indian ‘start-up’ irrespective of the sector in which the start-up is engaged. The definition of ‘start-up’ shall be as per Department for Promotion of Industry and Internal Trade’s Notification No. G.S.R. 364(E), dated the 11th April, 2018.
Provided that if the investment is in equity instruments, then the sectoral caps, entry routes and attendant conditions shall apply. |
(iii) equity or equity linked instrument or debt instrument issued by an Indian startup company irrespective of the sector in which the startup company is engaged:
Provided that if the investment is in equity instruments, then the sectoral caps, entry routes and attendant conditions shall apply. |
Definition of start-up amended. The reference of an old notification dated 2018 is deleted and the definition in accordance with the recent notification of DPIIT is substituted in Rule 2(an) above. |
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