The Ministry of Finance has released draft rules that will replace the FEM (Non-Debt Instruments) Rules, 2019: the first major overhaul of India’s FDI/FPI legal architecture in years. Here’s what’s changing:
1. Consolidated Definitions
The rules sharpen key concepts: “eligible investee entity,” “foreign controlled entity (FCE),” “ownership” (>50% beneficial holding), and “control” (board appointment rights, or 10%+ voting rights via agreements). This tightens the indirect-investment/round-tripping framework.
2. Two-Tier Investment Structure
FDI: 10%+ equity investment
FPI: below 10%
Automatic reclassification kicks in if FPI holdings cross the 10% threshold on Indian exchanges.
3. Broader Modes of Investment
Beyond subscription and purchase, the rules formally recognize gifts (with LRS limits for repatriation cases), pledges, OCB transfers, depository receipts, NPS subscription for NRIs/OCIs, and equity swaps, including investment vehicles swapping units for SPV equity.
4. International Listing Gets a Dedicated Framework (Annexure I)
Indian public companies can now list equity directly on international stock exchanges, subject to:
Eligibility screens (no debarment, no wilful default, no fugitive economic offender status)
INR-denominated, dematerialized holding
A 10% foreign-holding threshold triggering mandatory divestment
Restrictions on transferring such equity back to Indian residents (only via delisting, IBC resolution, buybacks, M&A, or inheritance)
5. Bifurcated Regulatory Oversight
RBI administers the rules operationally (payments, reporting), while DPIIT retains interpretive authority over FDI policy itself a division of labor that’s likely to matter in ambiguous sectoral-cap situations.
6. Pricing Discipline
Arm’s-length, internationally accepted valuation methodologies remain mandatory (SEBI norms for listed cos, CA/Merchant Banker/Cost Accountant certification otherwise), except for rights issues.
Why it matters: This isn’t just a rebranding exercise the expanded treatment of FCEs, indirect investment, and cross-border listing signals India is trying to close structuring gaps while simultaneously opening a formal channel for outbound listings. Worth watching how Annexure-II (the actual sectoral cap policy) evolves alongside this.
Disclaimer: This is a summary of a draft notification for informational purposes and not legal advice.