FEMA Amendment 2024: Key Changes for FDI and Overseas Investment
Background of FEMA Amendment 2024
The Hon’ble Finance Minister during the Union Budget 2024 had announced simplification of rules and regulations for Foreign Direct Investment (“FDI”) and Overseas Investment, as one of the initiatives. Accordingly, Department of Economic Affairs (“DEA”), Ministry of Finance has introduced the FEMA Amendment 2024 through the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2024 (“Amendment Rules”) to amend the existing Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“Principal Rules”) vide notification dated 16.08.2024 to streamline FDI and Overseas Investment regulations, fostering a more favourable environment for foreign investors and Indian companies.
Key Highlights of the FEMA Amendment 2024
Revised Definition of “Control”
- The definition of “Control” has been revised by omitting the previous definition in Rule 23(7)(d) and introducing a new definition under Clause (da) in Rule 2.
- This amendment ensures consistency with the definitions set forth in the Companies Act, 2013, and the Limited Liability Partnership Act, 2008.
Definition of “Start-up Company”
- Insertion of Clause (an) in Rule 2 with respect to the definition of “start-up company.”
- This harmonizes with the definition of ‘start-up company‘ given under the Government of India’s notification G.S.R. 127 (E) dated February 19, 2019, issued by the Department for Promotion of Industry and Internal Trade.
Government Approval for Transfer of Equity Instruments
- Earlier, under the proviso for Rule(9)(1)(i), prior Government approval was required for any transfer of equity instruments in case the company is engaged in a sector which requires government approval.
- Now, the FEMA Amendment Rules make it mandatory to obtain prior Government approval for transfer of equity instruments in all cases wherever Government approval is applicable.
Insertion of Rule 9A: Transfer of Equity Instruments
The transfer of equity instruments between a resident in India and a non-resident may occur via:
Swap of Equity Instruments
In compliance with the Companies (Share Capital and Debentures) Rules, 2014 and FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.
Swap of Equity Capital of a Foreign Company
- Adhering to FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and the Foreign Exchange Management (Overseas Investment) Rules, 2022.
- Prior Government approval shall be obtained for transfer of equity instruments in all cases wherever Government approval is applicable.
- Equity Capital shall have the same meaning as assigned to it in the Foreign Exchange Management (Overseas Investment) Rules, 2022, i.e., ‘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.
Schedule I Amendments
Earlier, Schedule I of the Principal Rules allowed an Indian company to issue equity instruments to a person resident outside India against:
- Swap of equity instruments
- Import of capital goods or machinery
- Pre-operative expenses
Post amendment, the Amendment Rules additionally permit the issuance of equity instruments in exchange for the swap of equity capital of a foreign company, adhering to FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and the Foreign Exchange Management (Overseas Investment) Rules, 2022.
Clause (a)(iii) in Paragraph (3) of Schedule I
- Earlier, aggregate foreign portfolio investment up to 49% of the paid-up capital, or the sectoral/statutory cap whichever was lower did not require Government approval if it did not result in a transfer of ownership or control from Indian citizens to foreign residents.
- Post amendment, aggregate foreign portfolio investment up to the sectoral or statutory cap does not require Government approval or sectoral compliance if it does not lead to a transfer of ownership or control from Indian citizens to foreign residents under the FEMA Amendment 2024.
- Other foreign investments remain subject to Government approval and sectoral conditions as outlined in the rules.
Enabling FDI in White Label ATMs Operations (WLAO)
FDI in White Label ATMs with 100% Sectoral Cap via automatic entry route to boost financial inclusion nationwide, subject to:
- Non-bank entities must have a minimum net worth of INR 100 crore as per the latest audited balance sheet.
- Entities providing additional financial services must also meet the minimum capitalization norms for foreign investment in those services.
- Foreign Direct Investment in White Label ATMs is subject to Reserve Bank guidelines under the Payment and Settlement Systems Act, 2007.
Schedule VII Amendments: FVCI Investments in Start-ups
- Earlier, under Schedule VII, a Foreign Venture Capital Investor (FVCI) could purchase equity or equity-linked instruments or debt instruments issued by an Indian ‘start-up’ irrespective of the sector.
- The definition of ‘start-up’ was as per Department for Promotion of Industry and Internal Trade’s Notification No. G.S.R. 364(E), dated April 11, 2018.
- Post amendment, the definition of ‘start-up’ shall be newly inserted under Clause (an) of Rule 2, i.e.,
“Start-up company” means a private company incorporated under the Companies Act, 2013 (18 of 2013) and identified as “startup” under the notification of the Government of India number G.S.R. 127 (E), dated 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, under the FEMA Amendment 2024.
Source and Official Notification
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- Ministry of Finance, notification dated 16th August 2024 regarding the FEMA Amendment 2024.
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Official notifications:
