Amendments to the Non-Debt Instruments Rules: What Changes for Foreign Investment in India

Amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules: the revised definition of a startup, share swaps and deferred consideration, sectoral caps for foreign portfolio investment and 100% FDI in white label ATMs.

Introduction

The Foreign Exchange Management Act, 1999 (“FEMA”), together with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”),¹ has been amended by the Ministry of Finance.² These amendments provide the legal framework governing foreign equity investment in India, covering both direct and indirect investments. The changes were introduced to align the regulatory regime under FEMA with the provisions of the NDI Rules, thereby streamlining the foreign investment process.

The primary objective of the amendment is to attract greater foreign investment into India by simplifying compliance requirements, reducing procedural complexities, and making the investment process more transparent and investor-friendly. By easing regulatory hurdles, the amendment aims to facilitate increased inflow of foreign capital, stimulate business activity, and support overall economic growth.

Key Amendments

Change in the Definition of Startup

The definition of “Startup” has been revised to align with the Government of India’s notification G.S.R. 127(E), dated 19th February 2019³, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.

Under the amended definition, a “Startup” refers to a private limited company, partnership firm, or limited liability partnership (LLP) that satisfies the following criteria:

• It has been in existence for no more than 10 years from the date of incorporation or registration.
• Its turnover has not exceeded INR 100 crore in any financial year since incorporation/registration.
• It is engaged in activities related to innovation, development, or improvement of products, processes, or services, or operates a scalable business model with the potential to generate significant employment or create wealth.

In addition, the rules now expressly define the term “Control”, thereby removing ambiguity and preventing varied interpretations. This inclusion provides greater clarity and consistency, ensuring that both existing and newly added provisions under the startup regime are interpreted and applied uniformly.

Share Swaps for Transfer of Equity Instruments

Another notable change introduced by the Amendment relates to the transfer of equity instruments⁴ by persons resident outside India. Under the revised framework, any such transfer, whether by way of sale or gift, from one non-resident to another must follow the procedure for obtaining government approval, wherever such approval is applicable. This marks a departure from the earlier position, where approval was required only if the Indian company in question operated in a sector specifically falling under the approval route. By broadening the scope, the Amendment ensures greater regulatory oversight over cross-border changes in ownership and control of Indian companies, thereby safeguarding compliance with sectoral restrictions and national interest considerations.

The Amendment has also clarified the treatment of share swap transactions. A share swap, instead of involving cash consideration, allows the acquiring company to issue or transfer its own shares in exchange for the shares of another company. This mechanism reduces immediate cash outflow, enables more efficient capital management, and facilitates mergers, acquisitions, and restructuring deals.

As per Rule 6 and Rule 9A⁵ read with Schedule I of the NDI Rules, such transactions are permissible. Accordingly, a Person Resident Outside India (PROI) may acquire shares of an Indian or foreign company in exchange for shares of another Indian company, provided the relevant sector falls under the automatic route and the applicable sectoral conditions are complied with.

The Updated Master Directions have further addressed prior ambiguity in this area. Paragraph 9 now explicitly confirms that investment through the swap of equity instruments is permissible even for downstream investments. However, such transactions remain subject to the NDI Rules and cannot be structured to bypass sectoral conditions or restrictions applicable to downstream investments. This clarification removes uncertainty for investors while reinforcing the principle that downstream investments must always remain compliant with the regulatory framework.

Under the NDI Rules, Rule 9(6)⁶ permits the use of deferred consideration in Foreign Direct Investment (FDI) transactions, but within a tightly regulated framework. Specifically, the deferment period cannot exceed 18 months from the date of execution of the principal transaction documents. Further, a Person Resident Outside India (PROI) may defer, withhold, or place in escrow up to 25% of the total consideration, typically to address contingencies such as post-closing adjustments, earnouts, or indemnity-related obligations. Crucially, the final settlement of consideration must adhere to the “fair value” requirements laid down under the pricing guidelines of the NDI Rules, thereby ensuring that the transaction remains compliant with the prescribed valuation norms.

However, despite this regulatory allowance, practical challenges have emerged. In recent years, reports have surfaced of the Reserve Bank of India (RBI) issuing notices in connection with downstream investment transactions involving transfers of equity instruments where deferred consideration structures were used. These notices suggested that such practices could potentially conflict with the legal framework of the FDI regime, raising concerns around compliance and regulatory interpretation. This highlights the need for investors and companies to exercise caution when structuring FDI deals with deferred consideration, especially in cases involving downstream investments, where stricter scrutiny and oversight are applied.

Foreign Portfolio Investment (FPI)

The Amendment has introduced significant changes in the regulatory framework governing investments by Foreign Portfolio Investors (FPIs).

Previously, FPI investment in an Indian company was capped at a fixed threshold of 49% ownership, irrespective of the sector in which the company operated. This uniform cap often created compliance hurdles, even in sectors where the government had permitted higher levels of foreign ownership under the FDI policy.

The Amendment removes this fixed cap and instead aligns FPI investment limits with the sectoral caps or statutory caps prescribed for that particular industry. In other words, the maximum extent of FPI participation in a company will now depend on the foreign investment ceiling applicable to that specific sector (for instance, 74% in private sector banks, 100% in certain infrastructure sectors, etc.).⁷

Under the revised regime, FPI investments will not require prior government approval or compliance with additional sectoral conditions, provided that such investments:

• Do not breach the sectoral/statutory cap, and
• Do not result in transfer of ownership or control of an Indian company from resident Indian citizens to persons resident outside India.

This is particularly important because the law distinguishes between ownership (majority shareholding and voting rights) and control (the right to appoint majority directors, control management, or policy decisions). The Amendment ensures that as long as FPIs are passive investors without shifting ownership/control, the investment is considered under the automatic route.

However, once FPI investment:

• Exceeds the permissible sectoral/statutory cap, or
• Results in a change of ownership or control in favor of non-residents,

then such investment will mandatorily require government approval and compliance with all relevant sectoral conditions (such as security clearances in telecom, caps in insurance, or local sourcing requirements in retail).

In effect, this change introduces greater flexibility and harmonization with the broader FDI framework. It provides clarity for FPIs, reduces unnecessary compliance for passive investments, and at the same time preserves regulatory oversight in cases where foreign investment could alter the ownership or control structure of Indian companies in sensitive sectors.

White Label ATMs

The Amendment introduces a new entry for White Label ATMs (WLAs), allowing 100% Foreign Direct Investment (FDI) through the automatic route. This amendment aligns the rules with the provisions of the Consolidated FDI Policy of 2020, thereby removing any regulatory inconsistency in this sector.

White Label ATMs are Automated Teller Machines set up, owned, and operated by non-bank entities. Unlike traditional ATMs, which are managed by banks, WLAs provide ATM services without being directly linked to a particular bank. Their primary objective is to expand the reach of ATM services, particularly in rural and semi-urban areas where banks may not find it commercially viable to establish branches or ATMs.⁸

Permitting 100% FDI under the automatic route is expected to attract greater foreign participation, enhance technological innovation, and expand the ATM network across the country. However, such investments will remain subject to strict regulatory oversight. Investors and operators will be required to comply with the specific criteria and operational guidelines issued by the Reserve Bank of India (RBI) under the Payment and Settlement Systems Act, 2007, including conditions relating to authorization, interoperability, customer service standards, security protocols, and grievance redressal mechanisms.

In addition, the Amendment provides that investors must also adhere to any further conditions prescribed in the rules, ensuring that the inflow of foreign investment does not compromise regulatory safeguards or financial stability.

In effect, this policy shift is aimed at encouraging financial inclusion by increasing ATM penetration, leveraging foreign capital and expertise, and reducing the dependence on banks alone for providing cash-dispensing infrastructure.

Conclusion

The Amendment marks a significant step forward in strengthening India’s regulatory framework for foreign investments. It reflects the government’s broader policy approach of simplifying FDI procedures and fostering a more investor-friendly environment. By harmonizing definitions with existing government notifications, expanding the scope of approval requirements for secondary transfers, and expressly permitting share swap transactions involving foreign companies, the Amendment brings greater clarity and consistency to the regime.

Notably, the removal of the 49% threshold for Foreign Portfolio Investors (FPIs) and the inclusion of White Label ATMs under 100% FDI through the automatic route demonstrate the government’s intent to adapt to evolving market dynamics and global investment trends. These changes not only streamline the regulatory landscape but also provide greater flexibility for both domestic and foreign investors.

Overall, the Amendment is expected to enhance efficiency, reduce regulatory burdens, and encourage larger capital inflows, thereby supporting India’s ambition to emerge as a leading global investment destination.

Footnotes

1. The NDI Rules were notified vide S.O. 3732(E) dated 17 October 2019, issued by the Department of Economic Affairs, Ministry of Finance. ↩

2. Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2024, notified by the Department of Economic Affairs, Ministry of Finance, on 16 August 2024. ↩

3. DPIIT Notification No. G.S.R. 127(E) dated 19 February, 2019 ↩

4. As per the Rule 2(k) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, “equity instruments” shall include equity shares, convertible debentures, preference shares and share warrants issued by an Indian company. ↩

5. Rule 6 and Rule 9A read with Schedule I of the NDI Rules ↩

6. Rule 9(6) of the NDI Rules ↩

7. Rule 3(a)(iii) of Schedule 1 of the NDI Rules ↩

8. NDI Rules with Paragraph 5.2.25 (White Label ATM Operations) of the Consolidated Foreign Direct Investment Policy (effective from 15 October 2020). ↩