top of page

All about Foreign Direct Investment (FDI) in India Post October 2019

Updated: Jun 15, 2020

1.1 The FEMA 1999 amended by the Finance Act 2015 to realign powers between Central Government (CG) and RBI. Certain amendments were in the following sections of the Foreign Exchange Management Act, 1999.

  • Section 6 - Capital Account Transaction

  • Section 46 - Power of Central Government to make rules and

  • Section 47 - Power of RBI to make regulations

1.2 Now capital instruments issued under Foreign Exchange Management Act, 1999 (FEMA) has been classified in two parts as debt and non-debt instruments.

1.3 The RBI (in consultation with the CG) is entrusted with the responsibility to draft regulations for debt instruments while the Central Government (in consultation with the RBI) is entrusted with the power to frame rules for non-debt instruments.

1.4 By notification dated 17 October 2019 the central government has notified Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) and rescinded the FEMA TISPRO regulations.

1.5 On notification dated 16 October, 2019 the MINISTRY OF FINANCE (Department of Economic Affairs) has disclosed the following instruments as Debt instruments and Non-Debt Instruments.

Debt Instruments: -

  1. Government bonds

  2. Corporate bonds

  3. All tranches of securitisation structure which are not equity tranche;

  4. Borrowings by Indian firms through loans

  5. Depository receipts whose underlying securities are debt securities.

Non -Debt Instruments: -

  1. all investments in equity in incorporated entities (public, private, listed and unlisted);

  2. capital participation in Limited Liability Partnerships (LLPs);

  3. all instruments of investment as recognised in the FDI policy as notified from time to time;

  4. investment in units of Alternative Investment Funds (AIFs) and Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InVITs);

  5. investment in units of mutual funds and Exchange-Traded Fund (ETFs) which invest more than fifty per cent in equity;

  6. the junior-most layer (i.e. equity tranche) of securitisation structure;

  7. acquisition, sale or dealing directly in immovable property;

  8. contribution to trusts;

  9. depository receipts issued against equity instruments.

2. Foreign direct investment - Scope and coverage of FDI and FPI

2.1 If the foreign portfolio Investment exceeds to 10% or more then it is reclassified as Foreign Direct Investment. But if FDI falls below 10% then it should not be reclassified as the FPI.

2.2 Reporting requirement in FDI: -

  • Pricing as per SEBI regulations

  • FC-GPR reporting required

2.3 Reporting requirement in FPI: -

  • Pricing as per SEBI regulations

  • FC-GPR reporting not required

3. Who can Invest?

3.1 Any Non-resident Entity van invest except Citizen or an entity incorporated in Bangladesh or Pakistan need prior government approval but Citizen or an entity incorporated in Bangladesh or Pakistan cannot invest in the Defense, Space and Atomic energy even with approval

Definition of Equity Instruments

3.2 The definition of “capital instruments” has been replaced with the term “equity instruments” throughout the NDI Rules.

3.3 Equity instruments mean equity shares, convertible debentures, preference shares and share warrants issued by an Indian company;

Explanation: -

  • Equity shares issued shall include equity shares that have been partly paid.

  • Fully, compulsorily and mandatorily convertible debentures.

  • Fully, compulsorily and mandatorily convertible preference shares.

  • Price on the date of conversion should be more than the FMV on issue date)

  • In case of share warrants, at least twenty-five per cent of the consideration shall be received upfront and the balance amount within eighteen months of the issuance of share warrants.

  • Equity instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.

  • Partly paid shares shall be fully called-up within twelve months of such issue. Twenty- five per cent of the total consideration amount (including share premium, if any) shall be received upfront.

Issuance of equity shares

3.4 Consideration must be for cash. The non-cash considerations are allowed by FDI policy if the investee company is engaged in an automatic route sector as follows: -

  1. In lieu of External commercial borrowing

  2. For import of capital goods and machinery

  3. Share swap if Indian company is in automatic route sector

  4. For pre- incorporation or pre-operative expenses incurred by the said non-resident entity up to a limit of 5% of its authorized capital or USD 500,000 whichever is less subject to the condition that company should be

- wholly owned subsidiary set up in India by a NR entity

- operating in a sector where 100 percent foreign investment is allowed in the automatic route

- no FDI linked performance conditions

3.5 Valuation of issue price of FDI shares should be as per SEBI guidelines in case of listed companies. In case of unlisted companies, valuation should be at

- arms’ length price basis

- Any internationally accepted pricing method

- Valuation certificate by CA

3.6 Shares must be issued within 60 days of the funds.

4. Tightened Norms for FDI from neighboring countries with a view to curb “opportunistic takeovers or acquisitions”

4.1 The press note-3 has been released on 17 April,2020 by the Department for Promotion of Industry and Internal Trade (DPIIT) and amended the Consolidated FDI policy, 2017 which came into effect from 22 April,2020.

4.2 In pursuant to the press note:

  • An entity situated in a country which shares land border with India, or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, is inter alia permitted to invest in Indian entities only under the government approval route.

  • Further, any transfer of ownership of any existing or future foreign direct investment (FDI) in an entity in India (directly or indirectly) resulting in the beneficial ownership falling within the purview of the above restrictions, would require the government’s approval.<