Foreign exchange management rules notified


The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI rules), notified by the central government on 17 October 2019, along with the Reserve Bank of India’s (RBI) Foreign Exchange Management (Debt Instrument) Regulations, 2019, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, will supersede the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO).

The Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, have also been included in the NDI rules with no substantial changes. Under the new rules, the central government will have powers of regulating transactions not involving debt instruments, in consultation with the RBI, while the RBI can frame regulations for transactions involving debt instruments, in consultation with the central government. The central government has issued a notification setting out instruments that would be categorized as debt instruments and non-debt instruments.

The rules also revised foreign portfolio investment (FPI) limits to the relevant sectoral caps. The individual (and investor group) limit for FPIs is 10% of the total paid-up equity capital on a fully diluted basis, or less than 10% of the paid-up value of each series of debentures or preference shares or share warrants. Further, the aggregate limit for FPIs is 24 % of paid-up equity capital on a fully diluted basis, or paid-up value of each series of debentures or preference shares or share warrants.

With effect from 1 April, 2020 the aggregate FPI limit will be the sectoral caps applicable as per schedule I of the NDI rules, provided:

  • The aggregate limit can be decreased by an Indian Company to 24%, 49% or 74%, as it deems fit, before 31 March 2020, by approval of its board of directors and its shareholders by a special resolution. The Indian Company may at any time increase the aggregate limit (not beyond the prescribed sectoral cap) by approval of the board and shareholders;
  • The aggregate FPI limit in a sector where FDI is prohibited would be 24% of the Indian Company’s paid-up equity capital on a fully diluted basis, or such same sectoral cap percentage of paid-up value of each series of debentures or preference shares or share warrants;
  • FPIs that invest in an Indian Company in breach of the prescribed limits shall have five business days to divest the investments that caused the breach. If they fail to do so, the entire investment in the Indian Company by such FPI and its investor group would be treated as an FDI investment;
  • Sectoral Cap for Single Brand Product Retail Trading has been restored to being automatic for foreign investment up to 49%, and approval route beyond 49%, as was before the amendment brought about in these caps, in 2018;
  • Unlike what was anticipated, the NDI rules do not incorporate the changes made by Press Note 4 of 2019, issued by the Department for Promotion of Industry and Internal Trade, bringing about several changes in investment norms in respect of digital media, coal mining, contract manufacturing and single brand retail trading;
  • FPIs may invest on repatriation basis in: (a) domestic mutual funds, Category III AIFs and offshore funds (for which no objection certification as per the mutual fund regulations has been issued by the Securities and Exchange Board of India (SEBI), which in turn invest more than 50% in equity; or (b) may invest in units of real estate investment trusts and infrastructure investment trusts, subject to relevant SEBI regulations.

The business law digest is compiled by Nishith Desai Associates, a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. The firm specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.