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Topic : Amendments to Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FEMA NDI Rules)

GS-3 Mains  : Economy

Revision Notes


  • Foreign investments crucial for India’s $5 trillion economy target by 2025-26.
  • Amendments aim to streamline regulations for attracting foreign investment.
  • Implemented by Ministry of Finance via notification dated April 27, 2020.

Key Amendments:

  • Acquisition of Securities in a Rights Issue by Renouncement:
    • Previously, relaxed pricing rules for rights issue to foreign investors in unlisted companies not applicable to renounced rights shares.
    • New Rule 7A introduced: pricing guidelines now apply to foreign acquisition of renounced rights shares.
  • Single Brand Retail Trading (SBRT):
    • 100% foreign investment allowed under automatic route.
    • Sourcing norms for SBRT entities with “state-of-the-art” or “cutting-edge” technology clarified:
      • Exemption from 30% local sourcing requirement applies for 3 years from the earlier of opening first store or starting online retail.
  • Insurance Intermediaries:
    • 100% foreign direct investment (FDI) allowed under automatic route (subject to conditions) as of February 21, 2020.
    • Now reflected in FEMA NDI Rules amendment.
  • Conditions for Divestment by Foreign Portfolio Investors (FPIs):
    • FEMA NDI Rules specify divestment process if FPIs exceed investment limits.
    • Amendment adds: divestment/reclassification subject to additional conditions by SEBI and RBI.

Foreign Investment on International Exchanges

  • Effective Date: January 24, 2024
  • New Definition: “International Exchange” refers to exchanges in approved locations (Schedule XI of the Rules).
  • Listed Indian Company Expanded: Now includes companies registered on an International Exchange.

Investment by Permissible Holders (New Chapter X)

  • Permissible holders can invest in Indian companies listed (or to be listed) on an International Exchange under the Direct Listing of Equity Shares scheme (Schedule IX).

Direct Listing of Equity Shares on International Exchanges (New Chapter XI)

  • Listing Requirements: Shares must be listed on specified International Exchanges.
  • Compliance: Adherence to prohibited activities and sectoral caps.
  • Equity Shares: Dematerialized and rank equally with Indian exchange shares.

Permissible Holder Definition

  • Includes holders (and beneficial owners) of equity shares on an International Exchange.
  • Requires approval from the Central Government for holders/entities from countries sharing a land border with India.

Compliance for Indian Companies Listing Internationally

  • Securities Contracts (Regulation) Act, 1956
  • Securities and Exchange Board of India Act, 1992
  • Depositories Act, 1996
  • Foreign Exchange Management Act, 1999
  • Prevention of Money-laundering Act, 2002
  • Companies Act, 2013
  • Relevant Equity Issuance Laws (existing laws and new scheme requirements)

Pricing of Issued Equity Shares

  • Minimum price must be at least as high as those issued to domestic investors under applicable laws.


Challenges with FEMA NDI Amendment

Impact on Indian Companies:

  • Amendment creates hurdles for startups and smaller firms seeking foreign investment.
  • Prior government approval required for investments from countries sharing land borders with India (PN3 Requirement).

Key Issues:

  • Undefined ‘Beneficial Owner’: Creates confusion and reliance on thresholds from other laws.
  • Conservative RBI Approach: Impacts downstream investments by Foreign Owned or Controlled Companies (FOCCs) due to lack of clear definitions.
    • Notices to FOCCs and stricter scrutiny by RBI.
    • Law firms advise against relying on thresholds from other laws.

Approval Route Challenges:

  • Time-consuming process with high rejection rate.
  • ₹50,000 crore worth of proposals pending/rejected in past 3 years (201 applications).
  • Severe penalties for non-compliance (up to 3 times investment received) threaten startups.

Proposed Solutions:

  • Comprehensive Definition of ‘Beneficial Owner’:
    • Include ownership thresholds (10-25%) and control tests.
    • Customize based on sector sensitivity (higher scrutiny for telecom/defense).
    • Define control-conferring rights (excluding investor protection rights).
  • Consultation Mechanism:
    • Similar to Indian competition law, to clarify control based on company documents.


  • Clarifying definitions, establishing a consultation mechanism, and streamlining compliance are crucial to attract foreign investment and achieve the $5 trillion economy target.

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