On August 16, 2024, the Government of India, introduced some of the key amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) and issued the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (“Amendments”). The amendments are made in line with the announcement made in the recent Union Budget 2024-25 in relation to simplification of existing FEMA regulations for Foreign Direct Investment (“FDI”) frameworks.
One of the key amendments under NDI Rules is in relation to rules related to swap of shares.
As a part of deal transaction, many a times, cross acquisition takes places, whereby non-cash consideration, in partly or in full, in the form of shares is issued by the acquirer entity to the seller entity. Such swap of shares facilitate strategic acquisitions for two distinct group of entities without exchange of cash consideration.
For group entities intending to carryout swap of shares, involving international jurisdictions, one of the main consideration while execution of the deal transaction have been to clear regulatory hurdle under FEMA. Under FDI framework, NDI Rules permitted primary issuance of equity instrument to non-resident against swap of ‘equity instruments’ of another Indian company. Thus, such swap of shares by way of transfer was not permitted under the automatic route.
One of the amendments under NDI Rules by way of insertion of Rule 9A and amendments to schedule I to NDI Rules, recognises issuance of equity capital of foreign entity and transaction involving secondary transfer of shares for the swap of shares under automatic route. Such swaps are permissible so long as all the other compliances under FEMA NDI Rules and other applicable FEMA rules are complied with. Also, in cases where investment from land bordering countries or the sectors where specific approval is pre-condition, seeking RBI approval is still mandatory for the swap of shares.
The amendment is a welcome move as it facilitates swap of shares involving international jurisdictions (other than land-bordering countries) under an automatic route without requiring prior RBI approval, except in cases where a specific sector requires RBI approval. This not only ensure reduction in timeline for execution of a transaction, it also brings in ease of doing business with international jurisdiction.
For detailed discussion on the above topic, please feel free to contact devadhaantu@devadhaantu.in
