1. FEMA (NDI) Rules, 2019
and Recent Amendments
- Shivi Chola
Intern for Nov’21
D.M. Harish and Co.
2. Overview of the FEMA Act, 1999
Regulation &
Management
of
foreign
exchange
Dealing in
foreign
exchange, etc.
[Sec. 3]
Holding of
foreign
exchange, etc.
[Sec 4]
Current
account
transactions
[Sec 5]
Capital
account
transactions
[Sec. 6]
Export of
goods and
services
[Sec. 7]
Realisation
and
Repatriation of
foreign
exchange
[Sec 8]
Foreign
Investment
Investment made
by PROI
on a repatriable basis
In Equity
instruments of
Indian Company
To the capital of
LLP
Note- If a declaration is made by a person as per the provisions of the Companies Act,
2013 about a beneficial interest being held by the person resident outside India, then
even though the investment may be made by a resident Indian citizen, the same shall
be counted as foreign investment.
Foreign
Investment
Foreign Portfolio
Investment
Foreign Direct
Investment
+
=
3. Regulatory Authority and Laws
Debt
Regulated by
RBI
FEM (Debt
Instruments)
Regulation,
2019
Amended
Section 6 and 47
of the FEMA Act,
1999
Non-Debt
Regulated
by Central
Government
(Ministry of
Finance,
DEA)
FEM (Non-
Debt
Instruments)
Rules, 2019
Amended
Section 6
and 46 of
the FEMA
Act, 1999
Manner of
receiving
Payment and
Reporting
Regulated by
RBI
FEM (Mode of
Payment and
reporting of Non-
debt Instrument)
Regulation 2019
Instruments
FEM NDI Rules, 2019
FEM (Transfer of
Issue of security by a
PROI) Regulation
2017
FEM (Acquisition and
Transfer of Immovable
Property in India)
Regulation 2018
Supersedes
4. Debt Instruments
Government Bonds Corporate Bonds
Borrowing by Indian
firms through loans
Units of MFs with
less than 50% in
Equity
All tranches of
Securitisation
structure which are
not Equity Tranche
Non- Debt
Instruments
Equity
public, private,
listed and
unlisted
All instruments
recognized in
FDI Policy
Capital
Participation in
LLPs
Contribution to
Trust
Acquisition of
Immovable
Property
Depository
Receipts against
Equity Instruments
Investments into
units of AIFs,
REITs, and IIFs
Investment in
Mutual Funds
(which invest more
than 50% in equity)
5. Chapter II
General
Conditions
applicable to
all Investors
Chapter III
Investment by
PROI
Chapter IV
Investment by
Foreign
Portfolio
Investor (FPI)
Chapter V
Investment by
an NRI or an
OCI
Chapter VI
Investment by
other Non-
Resident
Investor
Chapter VII
Investment by
FVCI
Chapter VIII
General
provisions
Chapter IX
Acquisition and
Transfer of
Immovable
Property in India
Chapter I
Preliminary
OVERVIEW OF
FEM (NON-DEBT
INSTRUMENT)
RULES 2019
6. Rule 5- Permission for receiving Investment in
India
Investment into
India by PROI
Entry Routes
Investment
by PROI
Government
Route/ Approval
Route
Foreign
Investment
Promotion
Board
Automatic
route
Only information
to the Reserve
Bank of India
within 30 days of
Issue of shares
Sectoral
Caps
Foreign
Investment
Repatriation
basis by
PROI
Equity and Debt
Instruments of the
Company
Capital of an LLP
Indirect Foreign
Investment
Maximum
Investment
Investment
Limits
Investment otherwise than by
Rules, Regulations and
FEMA Act, 1999 not permitted
7. Sectoral Caps
NBFC
Not Registered
Both engaged in the
activity of investing
in Capital of other
Indian Entities
Prior Approval of
Government
Core investment
company
NBFC
Registered
100% Automatic
Route
Maximum Investment
Sector or Activities
specified in Table
Foreign Investment
upto sectoral cap
Sector or activities
not specified in
Table
Foreign investment
is permitted upto
100% on automatic
route
Onus of Compliance
with the sectoral cap
Company receiving
Foreign Investment
Amendments to the Sectoral Cap by FEM NDI Rules, 2019
(i) Single Brand Retail Sector: the sectoral cap and entry route for single brand product
retail trading for foreign investment is reduced to 49% from 100% under the automatic
route. Foreign investment beyond 49% will require government approval (Press Note No. 4
(2019 Series))
(ii) Defence Sector- increase in the sectoral cap for foreign direct investment (FDI) in the
defence sector to 74% in automatic route (Press Note 4 (2020 Series) dated 17 September 2020)
8. Rule 6 - Investments by PROI- Press Note 3 (2020 Series) dated 17
April 2020
Pre- Amendment
Rule 6
Citizens of Pakistan
and Bangladesh
Cannot invest without
prior approval of
Government
Entities Incorporated
in in Pakistan and
Bangladesh
Citizens or entities
incorporates in
Pakistan
Cannot invest in defence,
space, atomic energy and
sectors or activities
prohibited for foreign
investment
Rule 6 a
an entity of a
country, which
shares land
border with India
Cannot invest
without prior
government
approval
beneficial owner of
an investment into
India who is
situated in or is a
citizen of a country
which shares land
border
transfer of
ownership of any
existing or future
FDI in an entity in
India resulting in
Beneficial
ownership
Citizens or entities
incorporates in
Pakistan
Cannot invest in
defence, space,
atomic energy and
sectors or activities
prohibited for foreign
investment
Post Amendment
9. Who is a Beneficial Owner?
• - The term has not been defined in FEMA or
NDI Rules.
Definition of Beneficial
Ownership
Companies (Significant
Beneficial Owners) Rules
2018 (“Companies Rules”)
10% ownership / voting
rights or control / significant
influence
Prevention of Money-
laundering (Maintenance of
Records) Rules, 2005
(“PMLA Rules”)
25% controlling ownership /
profit share of the company
or the person who holds the
position of senior managing
official
Routes of Foreign Investment covered
Intention- seems to cover all foreign transactions with land sharing
nations
Foreign investment in LLPs- are permitted up to 100% under automatic route,
the fact that Neighboring Country Investments itself have been brought under
the approval route, leads to a possible conclusion that going forward LLPs may
no longer be open to investments from Neighboring Counties.
Unclear whether they apply to Foreign Portfolio Investment (“FPI”) route
in accordance with Schedule II of the NDI Rules
Fate of Existing Investments
Standard condition - Government approvals granted for foreign
investment under Government route allow for any further investment in
the investee company to be made without any subsequent approval
requirement, provided there is no change in the shareholding
percentage of the investor from the time of original investment.
As per new policy, Neighboring Country Investments, either under the
automatic route or under the Government route but, without the above-
stated standard condition, would require prior approval of the
Government before investing any further capital in such companies, even
if there is no change in the shareholding percentage of their investment.
10. Investment by FPIs
Investment in
Equity Instruments
by PROI on
repatriable basis
Listed Company
below 10% of the
post issue paid-up
equity capital on
fully diluted basis
Foreign Portfolio
investment
in 10% or more of
the post issue paid-
up equity capital on
fully diluted basis
Foreign Direct
Investment
Unlisted Company
Any investment is
Foreign Direct
Investment
FDI v. FPI
Schedule II
Each FPI
Total holding shall be
less than 10% of total
equity capital
Total holding of all
FPI’s together
Shall be less than
24% of total equity
capital
Before 31st March
2020
Pre- Amendment
11. Post- Amendment changes in FPI
Schedule II
Each FPI
Total holding shall be
less than 10% of
Total equity capital
Total holding of all
FPI’s put together
Shall be as per
Sectoral Cap
Applicable
Limit decreased can
be increased
Approval of BOD and
Shareholders in
special resolution in
General Meeting
FDI prohibited sector
aggregate limit to
24%
Indian Company
cannot reduce to
lower threshold
Limit can be
decreased to 24% or
49% or 74%
1ST April 2020
onwards
12. Investment by an NRI or OCI
Rule 12
Repatriation
Basis
Purchase or
Sale of Equity
Instruments
Non-
Repatriation
Basis
Purchase or
Sale of Equity
Instruments
Capital of an
LLP
Indian
Depository
Receipts
SCHEDULE III
Equity Instrument
All NRI or OCI
Shall not exceed
10%
Can be increased to
24% by in GM
Individual NRI or
OCI
Shall not exceed
8%
Domestic Mutual
Fund
Without limit
Mutual Funds which
invest more than
50% in equity
Public Sector
Enterprises
Without limit
Purchase according
to terms and
conditions in the
notice inviting bids
National Pension
System
Can subscribe to
NPS
Annuity and
accumulated saving
can be repatriable
Non- Repatriable
Listed
Security
Capital in
LLP
Convertible
notes issued
by Start-up
Unlisted
Security
Units of
Mutual Fund
Partnership
Firm Capital
Sole
Proprietor’s
Firm Capital
13. Downstream Investments
Note- The investment made by an NRI on a
non-repatriation basis was considered as on
par with resident investments and were
treated like domestic investments
Investment made by Indian entities
owned and controlled by NRIs
Amendment- Insertion of Clause 23(7)(i)(A) -
A new explanation to section 23(7)(i)(A) which
provides that an investment made by an Indian
entity which is owned and controlled by NRI’s on
non-repatriation basis shall not be considered for
calculation of indirect foreign investment.
- Same effect as resident individuals.
Foreign
Investor
Equity=50%
or more
Controlled by a
Foreign Investor
Indian Company
(Level 1)
Indian Company
(Level 2)
Investment by First
Level in Second Level
Such Indirect Foreign
Investment is
Is considered as
Downward Investment