On 17th October 2019, the Central government and Ministry of Finance after much deliberation came up with regulations notifying amendments in the provision of section 139, 143 and 144 of Finance Act 2015 of FEMA. It clarifies the power of the Centre concerning RBI in regulating foreign exchange transactions. It provides that the Centre may by consultation with RBI frame rules for regulating transactions not involving debt instruments.

The equity inflow in foreign direct investment, in India, in 2018-2019 dropped tremendously.  This happened for the first time in the last six years. This falling equity inflows triggered the government to examine India’s Foreign Direct Investment Policy. After much discussion, the government recently came up with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and the Foreign Exchange Management (Debt Instrument) Regulations, 2019 and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 superseding the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. Not only were these changes implemented, but the government in August 2019 also amended the FDI Policy to open up new sectors and liberalize the existing FDI Policy to increase the FDI inflow and create more opportunities in the Indian market. Further, a Press Note 4 was released in September 2019, consolidating all the amendments in FDI Policy.

The amendment was carried in 2015-16 budget while putting capital inflow as a priority over price regime in the backdrop of the TATA DOCOMO case.

Government Approach To New Amendments

To put it simply, the government has given high significance to increasing foreign direct investments through ways of enacting new amendments to achieve the said goal. These Rules bring about several investor-friendly changes providing the investors a smooth transactional experience. As a good and welcoming change for the new investors, the rules have been amended to provide for the only one-time valuation of convertible instruments, valuation is needed only at the time of their issuance and no valuation at the time of conversion. This reduced the risk and downfall of equity, which the investor would have otherwise faced due to a dual valuation. Earlier, there existed a requirement for an affirmative vote to be passed by at least seventy-five percent shareholders, as a way of “Special Resolution” for increasing the total investment capacity of Indian Companies for accepting foreign investment beyond 24% up to the applicable sectoral caps[1]. The new rules, with effect from 1st April 2020, have removed the need for an Indian Company to pass this Special Resolution for accepting foreign portfolio investment as per sectors and sectoral caps laid down for them. This has automatically enhanced the quantum of investment that may be accepted by Indian companies from foreign portfolio investors[2]. The removal of Special Resolution is, reasonably so, expected to create much more investment opportunities for foreigners in Indian companies, with a lesser regulatory burden and governmental intervention[3].

Some earlier regulations under FEMA were:


The above-mentioned regulations have been changed to:


Major Changes Brought

  • Devaluation of authority of RBI

The earlier provisions provided an ultimate authority to the RBI by giving it the power to approve all the transactions, but the new amendments have brought rules that the approval of any application of transaction will be decided by RBI with the consultation of the central government. Thus, it shows greater involvement of the Central government in foreign direct investments.

  • Replacement of definition of “capital instrument” with “equity instrument”, “non-debt instrument” & “debt instrument”.

The term “capital instruments” has been deleted and replaced with “equity instruments” throughout the NDI Rules. The new definition of equity instruments now includes convertible debentures, which wasn’t a part of capital instruments in the earlier rule.

  • Changes in certain other definitions.

Some changes are:

  1. Listed Indian Company- Chapter 1 section 2(ag)
  2. Sectoral cap- Chapter 1 Sec 2(am)
  3. The term debt instruments mean those instruments other than non-debt instruments.
  • Introduction of Hybrid securities

A definition of “hybrid instruments” has been introduced. Hybrid instruments are optionally or partially convertible preference shares or debentures and other such instruments as specified by the Central Government. These can be issued by an Indian company or trust to a person residing outside India. However, this expression has not been used in the NDI Rules.

  •  Startups

The definition is about Foreign Venture Capital Investor in Schedule VII. It has been revised in NDI 2019 rules.

  • Non incorporation of Press Note 4 of 2019 (“PN4”).

These new rules ignore Press Note 4 changes introduced in FDI policy by the Department of Promotion of Industry and Internal Trade.

  1. The definition of the manufacturing sector in Press Note 4 (PN4) involved contract manufacturing also, which has not been added in the new rules.
  2. PN4 gives a relaxed business condition for single-brand retail trading which is not clear anymore.
  3. No restrictions have been put on the uploading and streaming of news and current affairs through digital media.
  4. There is no account of the changes done in the sale of coal, coal mines or other associated activities.

This shows that the effort of govt is a stricter one rather than liberating it. 

  •  Pricing guidelines

It is unclear whether pricing guidelines have to be met at the time of conversion or at the date of issuance of convertible instruments. This uncertainty can create a ruckus while dealing with pricings.

  • Foreign Portfolio Investment

The old FEMA 20 policy provided for an individual limit of 10% and aggregated limit of 24% of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company whereas according to the new NDI Rules, which are in effect from 1 April 2020, the sectoral caps applicable to the company is to be set as the aggregate FPI limit which is set out in Schedule I of the NDI Rule.

  • Investment vehicle

The term “investment vehicle” is now also inclusive of mutual funds that invest more than 50% in Equity Instruments. These are governed by the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (Mutual Funds Regulations).

  • Requirement with respect to capitalization of pre-incorporation expenses.

If an Indian person has full ownership of a subsidiary of a foreign corporation then he may issue his shares to the holding company against any amount of pre-incorporation expenses of such holding company.

  • Provision for NRI and OCI

OCIs can enroll themselves in the national pension scheme governed by the Pension Fund Regulatory Board. They can invest in units of domestic funds with more than 50% equity.

  •  E- commerce

E-commerce can only be undertaken by companies incorporated under the Companies Act of 2013 or 1956.

  •  Debt regulations
  • All investment provisions have been moved to debt regulations.
  • No definition of convertible or optionally convertible debentures has been given, which creates a lot of confusion.
  • It is assumed that investors dealing with instruments are under ECB regulations.

Advantages of the New Rules

  1. The biggest upside for foreign investors is the full benefit of valuation at the time of conversion of convertible instruments.
  2. Changes brought under FPI are needed and welcomed by Indian companies and provide for much clarity.
  3. Changes brought under Mutual fund investments and Investment vehicles have considerably expanded the universe of investment opportunities available to an FPI investor.
  4.  The changes announced in Press Note 4 of 2019 relating to single-brand retail trading and contract manufacturing are aimed at an increase in India’s competitiveness and making it a manufacturing hub thus with an expected outcome of the creation of more jobs. The Reporting Regulations are largely similar to that of the TISPRO Regulations. However, the regulations governing remittance and reporting regulations are now consolidated in one regulation and would be much useful to the stakeholders and is thus a welcome change in that sense.

Disadvantages of New Rules

  1. It is to be noted that in Schedule II, where the extent of 24% aggregate limit for FPIs used to be exclusively for FPIs is now redefined to include “any other direct and indirect foreign investment in the Indian company permitted under these rules”. This is a major constraint for companies having FPI levels at the default 24% as extant, and would also appear to be difficult to operationalize.
  2.  Explanation under section 2 (k) seems to ignore that the same can also be issued by

unlisted companies in accordance with the Companies Act 2013.

  • Despite the changed nomenclature, the NDI Rules continue to use the term “capital instruments” in at least five or six places.


The Rules have been issued under Section 46 of Foreign Exchange Management Act, 1999 unlike TISPRO, which were regulations issued by RBI through the powers delegated to it by the Central Government under FEMA. Thus, where the new amendment may provide RBI an opportunity to efficiently utilize its resources towards lender supervision and implementation of monetary policies it also increases the involvement of government in framing and implementing policies on FDI in India which may also prove to be beneficial. While the Non-Debt Instruments Rules do not individually alter the regulatory framework of foreign investment transactions dramatically, it highlights the improvement in the regulatory approach going forward. Therefore, it features a more streamlined approach between the RBI and the Central Government for regulating foreign investments. Since it was evident that the RBI has been dealing with an enormous number of applications for seeking permissions for FDI under FEMA, accordingly now it remains to be seen how this change will affect the overall process and timelines of applications. The regulations appear to have simply moved one level up to the Rules under the Ministry of Finance.

However, it is high time for the government to step-up to address some of the anomalies and inconsistencies pointed out above, particularly, those relating to sectoral conditions and caps, to avoid any further confusion in these aspects. This is a good start in bringing reforms in the FDI sector, and now is the time when the greatest need for such reforms can be felt with India’s falling economy and more and more Indian companies needing funds. Moreover, at this time, when all global anger is collectively on China for spreading the virus, and being aggressive in trade and on borders, India should buck up to take the lead in being one of Asia’s largest manufacturing hub through good policy implementations and foresightedness.

[1] schedule 21(1) of Rules

[2] schedule 2 (i) (a) of rules

[3] schedule 2 (1) (i) of rules

Sukriti Agrawal

She is a final year student at Chanakya National Law University, Patna. Apart from law subjects, her interests lie in Economics, International relations and environmental issues.

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