The government on Friday permitted cross border share swaps. Also, it has harmonised the definition of Start-Up Company in Foreign Exchange Management rules, beside allowing 100 per cent Foreign Direct Investment (FDI) in white level ATM.
These changes are result of FY 2024-25 Union Budget announcement, where Finance Minister Nirmala Sitharaman talked about simplifying rules and regulations for Foreign Direct Investment and Overseas Investment.
Accordingly, Foreign Exchange Management (Non-debt Instruments) Rules, 2019 have been amended. “The amendments aim to simplify cross-border share swaps and provide for the issue or transfer of Indian company equity instruments in exchange for foreign company equity instruments,” a statement by the Finance Ministry said. Further it mentioned that such a move 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.
Downstream investments
The notification prescribed that transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India might be by way of swap of equity instruments, in compliance with the rules prescribed by the Central Government and the regulations specified by the Reserve Bank from time to time. It could also be done through swap of equity capital of a foreign company in compliance with the rules prescribed by the Central Government including the Foreign Exchange Management, (Overseas Investment) Rules, 2022, and the regulations specified by the Reserve Bank from time to time. In all these cases “prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable,” the notification said.
It also said that an Indian company might issue equity instruments to a person resident outside India against swap of equity instruments or import of capital goods or machinery or equipment (excluding second hand machinery) or through pre-operative or pre-incorporation expenses (including payments of rent, etc.)
Another key change brings further clarity on the treatment of downstream investments made by Overseas Citizen of India (OCI)-owned entities on a non-repatriation basis, aligning it with the treatment of Non-Resident Indian (NRI)-owned entities.
Harmonised definition of control
The notification harmonised the definition of control with the Companies Act and Takeover Code. “The much-awaited synchronisation of the definition of control across key regulations would ensure consistent interpretation by different regulators and lead to seamless transactions,” said Mayank Arora, Director- Regulatory, Nangia Andersen India.
In terms of start-ups the latest DPIIT notification raised the turnover threshold for being a start-up increased to ₹100 crore from ₹25 crore. Further, under the latest DPIIT notification start-ups would continue to be recognised as such for a period up to 10 years from incorporation. Now, with this alignment of the definition of start-up with latest DPIIT notification provides clarity on the status of start-ups for the purposes of FDI into India and would make such start-ups more attractive for foreign investor.