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With major plans to divest its stake in LIC, GoI issued the notification S.O. 1802(E) titled Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022, (“NDI Amendment Rules”) to align the requirements with the modified FDI policy issued vide Press Note No. 1, dated March 14, 2022.

Along with supporting the GoI’s divesture plans, NDI Amendment Rules have introduced the following changes to promote the ease of doing business in India:

1. Extension of conversion term:

Rule 2(e) defines the term “Convertible Note” as an instrument issued by a Startup acknowledging the receipt of money as an initial debt repayable or convertible into such number of equity shares at the option of the holder within five years from the date of issue has now been amended to a period of ten years. This allows the Startup an additional period to repay the debt and avoid diluting the equity.

However, where equity shares issued by an Indian Company contain an option or a right to exit, a minimum lock-in period of one year or period as prescribed for a specific sector, whichever is higher, must be adhered and there shall be no assured exit price.

2. Inclusion of Body Corporates

The definition of an Indian Company now includes a company as defined in the Companies Act, 2013 or a body corporate established or constituted by or under any Central or State Act, which is incorporated in India; unless otherwise qualified by a reference to the company registered under Companies Act, 2013 only. However, an Indian Company excludes a society, trust, or any entity which is excluded as an eligible investee entity under the FDI Policy.

3. Declaration of beneficial interest

Where the beneficial interest is declared under the Companies Act, 2013, or any other applicable law to be in favour of a person resident outside India, it shall be regarded as a foreign investment, irrespective if the registered owner is a resident Indian citizen.

4. Issue of share-based employee benefits

The Indian Company can now issue equity shares to its directors and employees resident outside India pursuant to the Share-based Employee Benefits scheme formulated. The amendment also allows the Indian Company to issue such share-based employee benefits to directors and employees of the Holding company, Subsidiary company, including wholly-owned subsidiary, or Joint-venture resident outside India.

This inclusion shall allow companies to attract global talent and put some skin in the game to achieve better results.

Substitution of Rule 8 via the NDI Amendment Rules provides for the following conditions to be met for such issuance of share-based employee benefits –

  1. The scheme is compliant with provisions of the Securities and Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014, or any other applicable law
  2. The benefits so issued are in compliance with the sectoral cap as applicable
  3. Prior Government approval is required if the foreign investment in the company is under the approval route
  4. The benefits issued to a citizen of Bangladesh or Pakistan shall require prior Government approval
  5. shares acquired by a non-resident on exercising the option issued when they were a person resident in India shall be on a non-repatriation basis

5. No Government approval is required for M&A under the automatic route

Rule 19, as substituted by NDI Amendment Rules, provides for the issuance of shares to non-resident shareholders of the transferor company where a scheme of compromise or arrangement, amalgamation, merger, or reconstruction by way of a demerger has been duly approved by NCLT or any other competent authority by law basis following conditions:

The transfer or issue complies with entry routes, sectoral caps or investment limits, or attendant conditionalities. Where the issuance is likely to breach the sectoral limit or other requisite conditions, prior Government approval is required.

The Indian companies, including the resulting company, are not involved in any sector prohibited from investment by a non-resident person. However, where the M&A is effective for companies operating in a sector under the automatic route, no Government approval shall be necessary.

6. Explaining real-estate business

The explanation for the term “Real-estate business” in Schedule 1 is substituted and now means dealing in land and immovable property with a view to earning profit therefrom. It excludes the following –

7. Inclusion of LIC under Insurance Company in Schedule 1 [F.8]

With the NDI Amendment Rules, LIC can accept foreign investment up to 20% under the automatic route. Further, LIC will be required to comply with other prevailing conditions as applicable to Indian insurance companies.

With all necessary compliance, the stock is targeted for a medium to long-term hold by industry experts, hoping to reap exceptional returns.

These amendments being notified, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, are now in sync with the FDI policy issued by the Government. The NDI Amendment Rules will provide crucial clarity to business owners when seeking foreign investment, especially in the regulated sectors.

This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.



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