The Union Finance Ministry on Friday announced key amendments to foreign exchange (forex) regulations, including mandating government approvals for all investments originating from countries that share land borders with India.
The latest amendments also seek to simplify cross-border share swaps and streamline key definitions, such as “control”.
The updated regulations have aligned the treatment of downstream investments made by overseas citizen of India (OCI)-owned entities with those owned by non-resident Indians (NRIs) on a non-repatriation basis. This is expected to foster greater participation of NRI funds in the Indian market.
“This (amendments) will facilitate the global expansion of Indian companies through mergers, acquisitions, and other strategic initiatives, enabling them to reach new markets and grow their presence worldwide,” a Finance Ministry statement said on Friday, while announcing amendments to the Foreign Exchange Management Act (FEMA).
Of particular significance is the clarification on government approvals for investments. Previously, such approvals were required only when the Indian company operated in a sector where foreign investment was subject to government review. However, under the new amendments, government clearance will now be necessary for any transfer of shares involving countries that share land borders with India, regardless of the sector in question, explained Mayank Arora, director of regulatory affairs at Nangia Andersen India.
The amended rules have also brought clarity to the position of OCIs. “In a welcome move that will benefit OCIs, the relaxation available to NRIs — where investments made on a non-repatriation basis are not considered as FDI — has now been extended to OCIs,” said Rajesh Gandhi, a partner at Deloitte.
In another key change, the definition of “control” has been standardised to ensure consistency across various Acts and laws. The rules now specify that two or more foreign portfolio investors (FPIs), including foreign governments, will be considered part of an investor group if they share more than 50 per cent common control.
“These amendments underscore the government’s commitment to creating a foreign-investor-friendly climate, with continued efforts to simplify rules and promote ease of doing business,” said the Finance Ministry.
The move follows the July 23 Budget announcement which stated: “The rules and regulations for Foreign Direct Investment and Overseas Investments will be simplified to facilitate foreign direct investments, nudge prioritization, and promote opportunities for using Indian Rupee as a currency for overseas investments.”
The Foreign Exchange Management Act (FEMA) now also has a revised definition of a “startup” to align with the latest notification from the Department for Promotion of Industry and Internal Trade (DPIIT). Under the latest DPIIT notification, turnover threshold for being a startup has been increased from Rs 25 crore to Rs 100 crore. Further, startups would continue to be recognised as such for a period up to 10 years from incorporation.
“This alignment of the startup definition with the DPIIT’s broader framework provides clarity on the status of startups for FDI purposes and will make such startups more attractive to foreign investors,” said Arora.
Additionally, a specific provision dealing with the swap of equity shares has been introduced. This allows for share swaps even in cases where government approval is required, whether due to the sector or the geographical origin of the foreign investor. Such swaps will be permitted only after government approval has been obtained. The definition of equity capital has also been updated to align with the latest Foreign Exchange Management (Overseas Investment) Rules, 2022.
First Published: Aug 16 2024 | 10:41 PM IST
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