Analysis of The Foreign Exchange Management (Non-debt Instrument) Rules, 2019

The Ministry of Finance vide its notification dated 17th October 2019 issued the Foreign Exchange Management (Non-debt Instrument) Rules, 2019 (hereinafter referred to as “Rules“), in supersession of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (hereinafter referred to as “FEMA 20R“) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.

The Rules bring a number of investor friendly changes. These are:

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1 Reduction in equity downside risk due to dual valuation:1.1 Removal of the requirement of Special Resolution for accepting foreign portfolio investment based on sector specifications:

1.1.1 Clarity on undertaking e-commerce business:

1.1.2 More investment options for foreign venture capital investors:

1.1.3 How can we at LawDocs help you with the foreign investment?

1.2 Related

Reduction in equity downside risk due to dual valuation:

The valuation of convertible instruments is to be done only at the time of their issuance and

not at the time of their conversion. This reduces the equity downside risk that the investor would otherwise face due to a dual valuation.

Removal of the requirement of Special Resolution for accepting foreign portfolio investment based on sector specifications:

 FEMA 20R require an affirmative vote by at least seventy-five percent shareholders (hereinafter refer to as (“Special Resolution”)), to be pass for increasing the total investment capacity of Indian Companies for accepting foreign portfolio investment, beyond 24% (twenty-four percent), upto the applicable sectoral caps. The Rules remove the need for an Indian Company to pass a Special Resolution for accepting foreign portfolio investment and automatically enhance the quantum of investment that may be accepted by Indian Companies from foreign portfolio investors, with effect from 1st April 2020 as per sectors and sectoral caps laid down under them. This removal of a Special Resolution expects to create more opportunities

for foreign portfolio investors for investment in Indian Companies, with lesser regulatory burden on Indian Companies.

Clarity on undertaking e-commerce business: 

The Rules state that B2B e-commerce activities can only be undertakes by Indian Companies. The implication of this change is that a foreign company cannot undertake B2B e-commerce activities.

More investment options for foreign venture capital investors: 

Foreign venture capital investment has also seen a few favorable changes pursuant to the inception of the Rules. More investment options have been created for foreign venture capital investors as they can invest in start-ups engage in any sector and

have to adhere to the Sector-Specific Conditions which were not there earlier.

How can we at LawDocs help you with the foreign investment?

Analysis of The Foreign Exchange Management

We, at Lawdocs, can provide you the most investor friendly investment structures for enabling your business to accept foreign investment

in accordance with the NDI Rules and all other applicable law.