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Alerts & Updates 20th Aug 2024

Another 9A change – this time, in foreign exchange laws to allow FDI-ODI swaps

Authors

Tanvi Goyal Associate Partner | Mumbai
Manendra Singh Partner | Mumbai
Ambareen Khatri Senior Associate | Mumbai

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  • ‘9A’ change was, for a very long time referred to new section 9A in the Indian Stamp Act, 1899 which had simplified the way stamp duties were paid for a very long time, and had eased the stamp duty regime for India Inc. Now, with another 9A change (albeit in the rules), the Government has simplified cross-border share swaps (commonly referred to as ODI-FDI swaps) and has allowed such structures without approval. This change will be whole heartedly welcomed by India Inc. as it opens up multiple structure avenues, including evaluation of reverse flip structures. The Central Government has amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) to usher in this important change along with certain other amendments, which are analysed below.

  • Sr. No. Amendment ELP Analysis
    A.         Cross-border share swaps (ODI-FDI) allowed – 9A change

     

    		 i)         TRANSFER – Insertion of new Rule 9A

    Prior to amendment

    Previously, there was no provision under the NDI Rules permitting swap of shares of an Indian company against shares of a foreign entity, that is, transfer of shares of an Indian company by resident shareholders to a foreign company (FDI) against shares of a foreign company (ODI). Hence, such structures were prima facie needed RBI approval.
    Post Amendment

    Amongst one of the major amendments, the transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India can now be done be by way of:

    • Swap of equity instruments, in compliance with rules prescribed by the CG and regulations specified by the RBI, from time to time;
    • Swap of equity capital[1] of a foreign company, in compliance with rules prescribed by the CG, including the Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules), and regulations specified by the RBI, from time to time.

    The above is, however, subject to prior Government approval for transfer in all cases wherever Government approval is applicable.

    ii)       ISSUANCE – Amendment to Schedule I

    Prior to amendment

    Previously, an Indian company could issue equity instruments to a person resident outside India only against swap of equity instruments, import of capital goods or machinery (excluding hand machinery) or pre-operative or pre-incorporation expenses (including payments of rent, etc.). Additionally, the Indian investee company had to be engaged in automatic sector.
    Post Amendment

    Now, an Indian company may issue equity instruments to a person resident outside India, in addition to above methods, against swap of equity capital of a foreign company in compliance with the rules prescribed by the Government including OI Rules, and the regulations specified by the RBI from time to time.

    The above is, however, subject to Government approval which 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 Government from time to time.
    ELP Comments
    The above amendments open new avenues for Indian companies and will potentially aid them in accessing new markets and expanding their global footprint and facilitate cross-border mergers and acquisitions, offshore holding structures.
    B.         Additional approvals for transfer by sale or gift by a person resident outside India There has been a change in the proviso to the rule providing for transfer by a person resident outside India of equity instruments of an Indian company by way of sale or gift (not being a non-resident India (“NRI”) or an OCI or an erstwhile overseas corporate body) to any person resident outside India-

    Prior to amendment

    “prior government approval shall be obtained for any transfer in case the company is engaged in a sector which requires government approval;”
    Post Amendment

    “prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable.”
    ELP Comments
    This amendment may require additional approvals for a person resident outside India transfer by sale or gift of equity instruments on an Indian entity in all cases and not just the sector wise approvals as provided initially. The investors are expected to be mindful about these approvals and obtain the same prior to entering transactions.
    C.         Clarity on the treatment of DIs made by OCI owned entities on a non-repatriation basis

     
    • Investment made by a Non-resident Indian (NRI) or an Overseas Citizen of India (OCI), including a company, a trust and a partnership firm incorporated outside India and owned and controlled by NRIs or OCIs, on non-repatriation was deemed as domestic investment and was not counted towards foreign investment.
    • On the same lines and in an obvious change, it is now clarified that investment made by an Indian entity which is owned and controlled by a NRIs or an OCI including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a NRI or an OCI, on a non-repatriation basis shall not be considered for calculation of indirect foreign investment
    ELP Comments
    The new rules bring in an obvious change to align the treatment of investment by such persons as domestic investment and without counting them towards foreign investment.

    The aforementioned amendment has also made it easier for OCI Holders to manage AIFs. For a detailed analysis on AIFs, please refer to our update here – https://tinyurl.com/4vb2pbwa
    D.        Standardizing the definition of ‘control’ The definition of “control” has been revised and it have been given the same meaning as assigned to it in the Companies Act, 2013 (CA2013) and for the purposes of Limited Liability Partnership (LLP), it  has been given to 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.

    ELP Comments
    The said definition has been standardized to maintain consistency with various laws and in turn help foreign investors make informed decisions during transactions.
    E.         Enabling FDI in WLAs The amendment has enabled FDI in WLAs under 100% automatic route. Additionally, the following conditions have been imposed for such an FDI-

    • A non-bank entity setting up WLAs must have a minimum net worth of INR 100 crore, maintained at all times.
    • If the entity also provides other financial services, it must meet any additional foreign investment requirements for those services.
    • FDI in WLA operations must follow guidelines set by the RBI under the Payment and Settlement Systems Act, 2007.
    ELP Comments
    By encouraging foreign investment, the government intends to expand banking services in areas that currently lack sufficient access particularly in semi-urban and rural areas.
    F.         Harmonizing the definition of “startup company” There has been harmonization of the definition of “startup company” to mean a private company incorporated under the CA2013 and identified as “startup” under the Government of India notification[2].

    ELP Comments
    This alignment is anticipated to make it easier for startups to attract foreign investment, thereby fostering innovation and entrepreneurship across the country.
    G.        Change in FPI guidelines

    Under the entry route section, the specific cap for aggregate FPI of 49% of paid-up capital on a fully diluted basis has been removed, and the requirement now states that aggregate FPI must adhere only to the sectoral or statutory cap.

    ELP Comments
    By allowing aggregate FPI to adhere only to the sectoral or statutory cap, the amendment provides more flexibility for foreign investors.

    The above amendments have been notified vide the Foreign Exchange Management (Non-debt Instruments)

    (Fourth Amendment) Rules, 2024 dated August 16, 2024 (available here).

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Manendra Singh, Partner, Email – ManendraSingh@elp-in.com ;

    Tanvi Goyal, Associate Partner, Email – tanvigoyal@elp-in.com  

    Ambareen Khatri, Senior Associate, Email – AmbareenKhatri@elp-in.com

  • References

    [1] “equity capital” means equity shares or perpetual capital or instruments that are irredeemable or contribution to non-debt capital of a foreign entity in the nature of fully and compulsorily convertible instruments. (as provided under OI Rules)

    [2] Notification number G.S.R. 127 (E), dated the February 19, 2019 issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, as amended from time to time.

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