When the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (the "Rules") were first notified in the latter half of 2019, the Rules revised the long standing regime in relation to monitoring and management of foreign direct investment ("FDI") in India, which had historically been the responsibility of the Reserve Bank of India (the "RBI"). The Rules made a departure and mandated that the RBI consult with the government of India in relation to several matters concerning FDI. The Foreign Exchange Management (Non-debt Instruments) (Third Amendment) Rules, 20202 (the "Third Amendment") introduced on July 27, 2020 by the Department of Economic Affairs under the ambit of Ministry of Finance, further amend the Rules to pass the baton back to the RBI for matters relation to monitoring and management of foreign direct investment ("FDI") in India.


The key changes to the Rules are mentioned below.

Insertion of Rule 2(A):

The Third Amendment has introduced a new rule, Rule 2(A) to the Rules. The new rule provides that the RBI shall be the authority that will administer the Rules. Accordingly, the RBI will now have the power to issue such directions, circulars, instructions, clarifications, as it may deem necessary, for effective implementation of the Rules.

Originally, the Rules provided that the RBI shall act in consultation with the government of India while exercising various powers. The Third Amendment has now removed the words "..and in consultation with the Central Government.." from Rule 3 and Rule 4 of the Rules. On account of this removal, the RBI will not have to consult with the government of India for disposal of applications filed by: (i) a person resident outside India seeking permission for undertaking FDI in India; and (ii) an Indian entity, in relation to receipt of FDI, respectively.

Revised foreign investment policy for the civil aviation sector:

(i) Air transport services.

Prior to the Third Amendment, eligible non-resident entities apart from overseas citizens of India ("OCIs") and non-resident Indians ("NRIs"), were allowed to invest upto 49% under the automatic route, in the equity instruments of an Indian company engaged in the business of: (i) scheduled air transport service or domestic scheduled passenger airline; or (ii) regional air transport service.3 However, OCIs and NRIs had the option to invest upto 100% under the automatic route, in the equity instruments of such companies. As per Serial No. 9.5(c) of Schedule I of the Rules, foreign airlines had to comply with additional requirements to own up to 49% (forty nine percent) stake in Indian companies, operating scheduled and non-scheduled air transport (including seeking of government approval, clearance from Ministry of Civil Aviation for import of technical equipment, among others). The earlier regime had also provided that such additional compliances will not apply in case of NRIs and OCIs. However, with the Third Amendment, while the aforesaid benefits continue to be available to NRIs, it shall no longer be available to OCIs.

The removal of the relaxation provided to the OCIs ensures consistency with the provisions of the Aircraft Rules, 1937 (the "Aircraft Rules"). The Third Amendment provides a note below the revised Serial No. 9.3 of Schedule I of the Rules, which clarifies that, to operate a scheduled air transport service, an air operator certificate is required, which is only provided to a company or a body corporate:

  1. which is registered and has its principal place of business within India;
  2. whose chairman and at least two-thirds of directors are citizens of India; and
  3. whose substantial ownership and effective control is vested in Indian nationals.4

(ii) Other conditions in relation to civil aviation.

Through the Third Amendment, the government of India has clarified the FDI regime for the civil aviation sector. The revisions made to Serial No. 9.5 of Schedule 1 of the Rules are as follows:5

  1. in relation to the business of operating cargo airlines, helicopter and seaplane services, the foreign airlines can now only invest into the equity of Indian companies and not in any other entity involved in such business;
  2. in relation investment by a foreign airline, the cap of 49% of foreign investment, for investment into an Indian company (operating scheduled and non-scheduled air transport services), shall include investments by foreign institutional investors (FIIs) and foreign portfolio investment (FPIs);
  3. investment in M/s Air India Limited ("Air India"), by NRIs who are Indian nationals shall not be subject to the sectoral cap of 49% and such NRIs shall be permitted to invest in Air India upto 100% under the automatic route;
  4. it has been clarified that substantial ownership and effective control of Air India shall continue to be vested in Indian nationals, as stipulated in Aircraft Rules;
  5. the foreign investment caps mentioned under Serial No. 9.2 (which relates to investments in airports) and 9.3 of Schedule I of the Rules (which relates to air transport services) will be applicable if there is no investment by a foreign airline in the entity receiving such foreign investment; and
  6. as also mentioned above, the relaxation provided to OCIs in relation to investments by foreign airlines, are now removed.


The implications of the Third Amendment can be summarized in the manner provided below.

  1. With the enactment of the Third Amendment, the administration and formulation of foreign investment rules has been shifted back from the government of India to the RBI. However, the Third Amendment has not revised all the provisions of the Rules which provided for consultation with the government of India. The Rules still maintain either the requirement of consultation with or formulation of policies by, the government of India, for several matters like gifts from NRIs to other non-residents, permissible time period beyond prescribed timelines for transfers by NRIs or OCIs, and rules regarding investments by foreign venture capital investors. Hence, introduction of Rule 2A to the Rules to grant administrative powers to the RBI, may not be enough to avoid complications that may arise in the interpretation of the Rules on account of such dual control.
  2. In addition to the restoration of powers of the RBI, the Third Amendment has essentially incorporated the changes introduced by Press Note 02 of 2020.6
  3. The earlier restriction on foreign investment not exceeding 49% in Air India has been relaxed but only for NRIs, who are Indian Nationals.
  4. While NRIs continue to enjoy the benefit of investing under 100% automatic route into air transport services, such benefit will no longer be available to OCIs.


The primary rationale for the introduction of the Third Amendment is to pivot the administration of the rules in relation to FDI, back to the RBI. The extension of the powers of the RBI and the restoration of its independence is a welcome move, given that RBI, with its prior experience and expertise in handling the process for FDI, is arguably the more appropriate authority to administer the Rules. However, in light of the Third Amendment and restoration of powers to RBI, the motivation of the government of India to enact the Rules (in replacement of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017) which granted the government of India more powers for administering the Rules earlier, becomes unclear.

The Third Amendment also paves way for the proposed disinvestment plans for Air India, as NRIs, who are Indian nationals, are now eligible to invest upto 100% under the automatic route in Air India. This relaxation will aid in making Air India a professionally managed airline in-line with its global peers.

Despite the positive undertone of the Third Amendment, there could be further complications in the interpretation of the Rules, as the role of the government of India has not been rolled back completely, thereby leading to a situation where there could be a regime of dual control. Like many of its predecessors, the functionality of the Third Amendment will be tested in the manner the government implements the same in terms of letting RBI reclaim its position as the primary administrator of the Rules.

Authors: Akhoury Winnie Shekhar | Abhishresth Goswami

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1. Reserve Bank of India or RBI is the central bank of India. Its primary responsibility is to regulate the monetary policy of the Indian economy

2. The Third Amendment can be accessed at http://egazette.nic.in/WriteReadData/2020/220699.pdf

3. Series Number 9.3, Schedule 1 of the Rules.

4. Paragraph I, Schedule XI of the Aircraft Rules.

5. Rule 5(ii) of the Third Amendment.

6. https://dipp.gov.in/sites/default/files/pn2_2020.pdf

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