Change in FDI Rules – Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022 to amend Rules 2019

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International - Foreign Trade

In view of upcoming IPO of LIC of India, the Government has amended Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019 through Press Note (1 of 2022) along with other modifications for consistency and further clarity of the existing FDI policy. Following key amendments have been made under the consolidated FDI policy circular 2020 as below.

  • Rule 2(e) which specify “Convertible note”, the period of five years has been substituted with the words ten years.

“An instrument issued by a start-up company acknowledging receipt of money initially as debt, repayable at the option of the holder, or which is convertible into such number of equity shares of that company, within a period not exceeding ten years from the date of issue of the convertible note, upon occurrence of specified events as per other terms and conditions agreed and indicated in the instrument.”

  • Rule 8 which specify “Issue of Employees Stock Options and sweat equity shares to persons resident outside India” has been modified to include Share Based Employee Benefits.

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.

  • Rule 19(1) which specify “Merger or de-merger or amalgamation of Indian Companies” has been modified to include scheme of compromise.

“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 certain conditions.”

  • Schedule I Paragraph (2)(f) which specify ‘Real Estate business or construction of farm house as sectors prohibited for FDI’ the explanation has been substituted namely: –

“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”

  • Inclusion of Body corporate in the definition of the Indian company; 

The amended rules has revised the definition of Indian Company. As per the amended rules, the term, ‘Indian Company’ shall mean: “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. Through this amendment, the Govt. has modified the definition of the Indian Company by including body corporates. After this amendment, body corporates established or constituted by or under any Central or State act will also be covered under the definition of Indian Company.

The amended FDI Rules further clarifies 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.

The amended FDI rules expressly provide that an ‘Indian company’ does not include a society, trust or any entity, which is excluded as an eligible investee entity under the FDI Policy.

  • Amendment in Schedule I, provisions w.r.t Life Insurance Corporation added.

The existing rules did not prescribe any specific provision w.r.t foreign investment in LIC. The Govt modified the FDI policy in March and allowed the FDI in LIC and prescribed the conditions thereof. The existing rules were not in line with the same, therefore, the amendments have been bought in the existing rules and specific provisions w.r.t FDI in LIC have been added to align the same with the modified FDI policy.

  • Para 2.1.7 of FDI policy is amended; "Foreign Investment" means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian Company or to the capital of a LLP.

Explanation: If a declaration is made by a person as per the provisions of the Companies Act, 2013 or any other applicable law, 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. The deeming provision included as explanation will require revisit of capital structure of the companies  

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