Over the years, India was facing a regulatory overlap when it came to the regulation and governance of foreign investments in India. While the Reserve Bank of India ("RBI") was the regulatory body to come up with the regulations and rules pertaining to issue or transfer of securities, the Central Government i.e., the Ministry of Finance, was still in charge of framing policies for foreign direct investment ("FDI") in India. This bifurcation of power was often muddled in instances where the FDI policy notified by the Government was incorporated by the RBI into its current foreign exchange regulations through master directions issued by it. However, there were instances of gaps and omissions in incorporating and implementing the FDI policy into the foreign exchange regulations. This regulatory overlap has been highlighted in various reports including the Report of the Committee1 on Financial Sector Reform 'A Hundred Small Steps' issued by Government of India in 2008. Subsequently, the Finance Act, 2015, proposed certain amendments to the Foreign Exchange Management Act, 1999 ("FEMA") to plug these loopholes.

Towards the fall of 2019, India witnessed the revamping of foreign exchange management regime. On 15 October 2019, the Ministry of Finance, Government of India, notified2 Sections 139, 143 and 144 of the Finance Act, 2015, which proposed amendments to Section 6 (Capital Account Transaction), Section 46 (Power of Central Government to make rules) and Section 47 (Power of RBI to make regulations) respectively, of the FEMA. Pursuant to these amendments: (a) RBI: RBI to specify, in consultation with Central Government, any class or classes of capital account transactions, involving debt instruments, which are permissible and to make regulations thereunder; and (b) Central Government: Central Government to prescribe, in consultation with RBI, any classes of capital account transactions, not involving debt instruments, which are permissible and to make rules thereunder.

These amendments resulted in bifurcation of power between the RBI and the Central Government. Now, pursuant to the said amendment, the RBI (in consultation with the Central Government) is assigned the responsibility to draft regulations for debt instruments, the Central Government (in consultation with the RBI) is entrusted with the power to frame rules for non-debt instruments. However, please do note that that the Central Government is empowered to determine instruments which would be classified as "debt instruments".

Subsequently, the Ministry of Finance on 16 October 2019, issued notification3, notifying instruments which shall be considered as "non -debt instruments" and "debt instruments". Additionally, the Ministry of Finance, by its notification dated 17 October 2019, also notified the Foreign Exchange Management (Non-debt Instruments) Rules, 20194 ("NDI Rules"). The NDI Rules were issued in supersession of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 ("TISPRO") and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. NDI Rules were further amended by the Ministry of Finance vide its notification dated 05 December 2019, by notifying the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019 ("Amendment Rules").

Consequent to notification of the NDI Rules, RBI vide its notification dated 17 October 2019, notified the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 20195 ("Payment and Reporting Regulations"). Payment and Reporting Regulations substitute the erstwhile TISPRO and provide for operational matters relating to mode of payment and reporting. Therefore, under the current foreign exchange regime, although the power to regulate the non-debt instruments has now been given to the Central Government, the mode of payment, attendant conditions and reporting requirements for investment in India by person resident outside India continues to lie with the RBI.

For debt instruments, the RBI, by its notification dated 17 October 2019, also notified the Foreign Exchange Management (Debt Instruments) Regulations, 20196 ("DI Regulations"), in supersession of TISPRO.

The NDI Rules do not completely overhaul the existing foreign exchange regulatory regime by superseding the TISPRO, but there are some note-worthy changes and introductions which are detailed below.


I. Classification of instruments into debt and non-debt instruments

The Ministry of Finance has classified the following instruments as "debt" and "non- debt" instruments. Additionally, all other instruments not covered below will be considered as "debt instruments".

Debt Instruments Non- Debt Instruments
  • Government bonds;
  • Corporate bonds;
  • All tranches of securitization structure which are not equity tranche;
  • Borrowings by Indian firms through loans;
  • Depository receipts whose underlying securities are debt securities.
  • All investments in equity in incorporated entities (public, private, listed and unlisted);
  • Capital participation in Limited Liability Partnerships (LLPs);
  • All instruments of investment as recognized in the FDI policy as notified from time to time;
  • Investment in units of Alternative Investment Funds (AIFs) and Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InVITs);
  • Investment in units of mutual funds and Exchange- Traded Funds (ETFs) which invest more than 50% (fifty)per cent in equity;
  • The junior-most layer (i.e. equity tranche) of securitization structure;
  • Acquisition, sale or dealing directly in immovable property;
  • Contribution to trusts;
  • Depository receipts issued against equity instruments.

II. Modification of existing definitions and introduction of new definitions

  1. The term "capital instruments", which appeared in TISPRO, has now been deleted and replaced with the term "equity instruments" throughout the NDI Rules. The definition of equity instruments7 under the NDI Rules is comparable to the definition of capital instruments under the erstwhile TISPRO and there is no significant change in the definition under the new NDI Rules.8
  2. A new definition of "hybrid securities" has also been introduced under the NDI Rules. The term "hybrid securities" has been defined under the NDI Rules as- "hybrid instruments such as optionally or partially convertible preference shares or debentures and other such instruments as specified by the Central Government from time to time, which can be issued by an Indian company or trust to a person resident outside India." However, the term has not been used in the NDI Rules and it is unclear what the Government's proposal in this regard is, as these instruments were regulated under the external commercial borrowing regime under TISPRO and were considered as "debt instruments" and not "capital instruments".
  3. The definition of the term "investment vehicle" under the erstwhile TISPRO was amended vide the NDI Rules to include inter alia mutual funds which invest more than 50% (fifty percent) in equity of investee companies as set out in the SEBI (Mutual Funds) Regulations, 1996. Although, the NDI Rules initially placed mutual funds under the definition of an "investment vehicle", the Amendment Rules have restored it to the earlier position under TISPRO and equity oriented mutual funds no longer classify as an "investment vehicle".
  4. The definition of the term "E-commerce entity" has been amended by the NDI Rules. As per the NDI Rules, "E-commerce entity" means a company incorporated under the Companies Act, 1956 or Companies Act, 2013. Under the erstwhile TISPRO, "E-commerce entity" also included a foreign company (as defined under the Companies Act, 2013) or an office, branch or agency in India owned or controlled by a person resident outside India and conducting e-commerce business. In terms of the new definition, only companies incorporated in India can engage in e-commerce activities in India.

III. Pricing Guidelines: No change as earlier position under TISPRO have been retained.

IV. Incorporation of Press Note 4

Press Note No. 4 of 2019 as released by Department of Promotion of Industry and Internal Trade on 18 September 2019 ("Press Note 4"), which was introduced to liberalize the foreign direct investment policy in various sectors of the Indian economy in relation to coal mining, single brand retailing, contract manufacturing and digital media was not taken into account by the NDI Rules. Since the NDI Rules were notified by the Ministry of Finance, Government of India, it was unclear whether the omission was deliberate or was a typographical error. However, now pursuant to the Amendment Rules, the changes brought in by the Press Note 4 have been incorporated in the NDI Rules.

V. Investment by Foreign Portfolio Investors ("FPI")

The NDI Rules have made some substantive changes in the foreign exchange regime relating to FPIs and their investment into Indian companies. Please note that under the NDI Rules, the investment limit of a single FPI or an investor group in the equity shares of each company continues to be below 10% (ten percent) of the total paid up equity capital on a fully diluted basis or paid up value of each series of debentures, preference shares or share warrant. Some key changes are as below:

  • With effect from 01 April 2020, the aggregate limit for investment by FPIs, in Indian companies, will be the applicable sectoral caps as provided in Schedule I of the NDI Rules. This change effectively ensures that for aggregate limits only sectoral limitations shall apply to the companies receiving foreign investment from FPIs, the change from TISPRO being that companies were earlier required to pass board and shareholder resolutions to increase the cap for FPI, beyond the aggregate limit of 24% (twenty four percent). Though this is not a major change, it is a change which reduces compliance.
  • Further, an Indian company by way of the approval of the board of directors and the approval of the shareholders' (by way of a special resolution) of the investee company may on or before 31 March 2020, decrease such aggregate limit for investments by FPIs to a lower threshold of 24% (twenty four percent) or 49% (forty nine percent) or 74% (seventy four percent).
  • Such Indian company may also increase its aggregate limit, if such company had decreased the same, to the aggregate limit of 49% (forty nine percent) or 74% (seventy four percent) or the sectoral cap/statutory ceiling. However, once the aggregate limit of FPI investment is increased, the same cannot be decreased to a lower threshold by the company.
  • This change was introduced in light of the report on "FPI Regulations"9 submitted by the working group under the chairman ship of Shri H.R. Khan, Deputy Governor, RBI, as it was observed by the committee that the listed entities in India have not taken any initiative to increase this investment cap which resulted in a very limited and fragmented investment head room available to FPIs. This change in NDI Rules (by setting the default FPI aggregate investment limit to the sectoral cap and permitting companies to reduce the same, if they desire so) would help opening up FPI investments in listed companies and would lead to improved aggregate investment head room for FPIs and contribute towards achieving higher weightage for India in widely followed international indices.
  • Aggregate investment by FPIs in a sector wherein FDI is prohibited, would be 24% (twenty four percent) of the Indian company's paid up equity capital on a fully diluted basis, or paid up value of each series of debentures, preference shares or share warrant.
  • In calculating the aggregate limits of FPIs in an Indian company, the investment by all FPIs in such Indian company whether under the FPI route or FDI route (direct or indirect foreign investment) shall be counted. There is some ambiguity on how this would play out as the aggregate limit refers to a 24% (twenty four percent) cap (which in subsequent NDI Rules is stated to be the sectoral limits) as well as referring to indirect foreign investment.
  • FPIs that invest in an Indian company in breach of the prescribed limits shall have 5 (five) business days to divest the investments that caused the breach. If they fail to do so, the entire investment in the Indian company by such FPI and its investor group would be treated as an FDI investment.

VI. Foreign capital investors ("FVCIs")

Under TISPRO, FVCIs could invest in the "securities" issued by start-ups. The term "securities" was not defined under TISPRO. Under the new NDI Rules, a FVCI can invest in 'equity or equity linked instrument or debt instrument issued by an Indian 'start-up' irrespective of the sector in which the start-up10 is engaged'. NDI Rules, replaces the word "securities" as existed under TISPRO, with the words "equity or equity linked instrument or debt instrument issued by an Indian start-up". Also, the words "irrespective of the sectors" is a new addition made by the NDI Rules.

VII. Mode of Payment and Reporting Requirements: No change as the earlier position under TISPRO have been retained.


The NDI Rules has not significantly overhauled the extant foreign exchange regulations. The bifurcation and demarcation of the regulatory powers between the Central Government and the RBI, in relation to regulating of foreign investment in India, has finally taken place under the NDI Rules. It is expected that this change will bring in a smoother and efficient regime with less regulatory overlap.

The amendments also, however, leave room for thought whether under this regime the Central Government would still come out with FDI Policy and incorporate the same into the NDI Rules since in both instances the policy as well as the rules are being made by the Central Government itself and could potentially create confusion if the amendments brought into the FDI Policy are not incorporated into the NDI Rules and vice-versa. For example, the Central Government when it came out with the NDI Rules had omitted to incorporate the provisions of Press Note 4 of 2019 which had created confusion on whether the Central Government was back tracking on the liberalizations it had announced earlier.


1. Headed by the erstwhile Governor of RBI, Mr. Raghuram Rajan

2. Ministry of Finance (Department of Economic Affairs), Notification No. S.O. 3715(E) dated 15 October 2019

3. Ministry of Finance (Department of Economic Affairs), Notification No. S.O. 3722(E) dated 16 October 2019

4. Ministry of Finance (Department of Economic Affairs) Notification No. S.O. 3732(E) dated 17 October 2019

5. Reserve Bank of India Notification No. FEMA.395/2019-RB dated 17 October 2019

6. RBI Notification No. FEMA 396/2019-RB dated 17 October 2019.

7. Rule 2 (k) of the NDI Rules defines "equity instruments" as- "equity shares, convertible debentures, preference shares and share warrants issued by an Indian company."

8. The following paragraph in the definition of 'capital instruments' under the erstwhile TISPRO has been deleted:

"Capital instruments shall include non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 shall be treated as debt and shall conform to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000."

The deletion raises questions over what the proposal for treatment of instruments that were non-convertible/ partially convertible or optionally convertible preference shares issued up to 30 April 2007, are since their original maturity may not still have expired (typically the maturity is a day less than 20 years).

9. SEBI (Foreign Portfolio Investors) Regulations, 2014 (superseded by SEBI (Foreign Portfolio Investors) Regulations, 2019).

10. As per Department for Promotion of Industry and Internal Trade's (DPIIT) Notification No. G.S.R. 364(E), dated the 11 April 2018- An entity shall be considered as a Start-up: (i) Up to a period of seven years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. In the case of Start-ups in the biotechnology sector, the period shall be up to ten years from the date of its incorporation/ registration. (ii) Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore; (iii) Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a 'Startup'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.