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The regulatory landscape for foreign investment in India has undergone significant changes in recent months. This is particularly so for foreign-owned and controlled companies (FOCC) regarding the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI rules).
Ratnadeep Roychowdhury
Partner
Cyril Amarchand Mangaldas
The Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (2024 amendment) eased the restrictions hampering share swaps. They allowed Indian companies to issue equity instruments to persons resident outside India by way of a swap with the equity capital of a foreign company. Such transactions must, of course, still comply with the Foreign Exchange Management (Overseas Investment) Rules, 2022. The 2024 Amendment went further to permit the transfer of equity instruments of Indian companies between residents and non-residents. This may be done either through a swap with another Indian company’s equity or with the equity capital of a foreign company. However, there was ambiguity as to whether the relaxations apply to FOCCs.
Rule 9(6) of the NDI rules permits the transfer of equity instruments by way of deferred payment arrangements for up to 25% of the total consideration for up to 18 months from the date of the transfer agreement. This is between a person resident in India and one resident abroad. Again, the NDI rule changes do not explicitly state whether FOCCs may enter into such arrangements.
Twinkle Tiwari
Associate
Cyril Amarchand Mangaldas
In response to these changes and to address longstanding ambiguities involving FOCCs, the Reserve Bank of India (RBI) updated its Master Direction on Foreign Investment in India in January 2025 (master direction). This provides much-needed clarity and flexibility for downstream investments. It aligns the regulatory framework with the 2024 amendment. FOCCs and direct foreign investors are now on an equal footing.
The master direction makes it clear that FOCCs may make downstream investments. This may be through mechanisms such as equity share swaps and deferred payment arrangements. If swaps of equity instruments and equity capital in accordance with rules 6 and 9A of the NDI rules and deferred payment arrangements as allowed by rule 9(6) of the NDI may be invested directly, they may also be invested downstream. However, as a precaution, FOCCs should ensure that such transactions do not circumvent the provisions contained in rule 23 of the NDI rules. These include restrictions on using borrowed funds for downstream investment. Furthermore, transactions intended to be carried out using deferred payment, escrow or indemnification arrangements must ensure that the share purchase agreements contain clauses and related conditions setting out such arrangements in full.
Another significant development relates to the reporting requirements in the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Rules, 2019. Where an Indian company makes an investment in another Indian company that is considered an indirect foreign investment, it must, within 30 days from the date of allotment of equity instruments, file form D1 giving details. This requirement now extends to cases in which the Indian entity making the investment subsequently becomes owned or controlled by a resident outside India. The original investment is reclassified as a downstream investment. The deadline for reporting is 30 days from the date of such reclassification. This is a landmark because it prevents downstream investment conditions from being avoided by sequencing transactions in such a way as to defeat them.
FOCCs have faced significant limitations in structuring investment deals, particularly those involving deferred payment mechanisms and equity swaps. The new direction eases such difficulties. The RBI’s recent clarifications on share swap and deferred payment mechanisms for FOCCs represent a progressive step in the foreign investment regime. By expressly allowing these arrangements, the master direction provides FOCCs with greater flexibility and certainty in structuring downstream investments. The reforms not only resolve longstanding ambiguities but also enhance India’s appeal as a destination for cross-border mergers, acquisitions, and strategic partnerships. In the evolving regulatory landscape, such measures will further facilitate foreign investment and contribute to India’s economic growth.
Ratnadeep Roychowdhury is a partner and Twinkle Tiwari is an associate at Cyril Amarchand Mangaldas
Cyril Amarchand Mangaldas
Peninsula Chambers Peninsula
Corporate Park
GK Marg, Lower Parel
Mumbai – 400 013, India
Contact details:
T: +91 22 6660 4455
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