Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022

Introduction

The Govt. vide. Notification No. S.O. 1802(E), Dated 1.04.2022 has amended the FEMA (Non-debt Instruments) Rules, 2019 (‘NDI Rules’)to align the same with the modified FDI policy as issued by the Govt. vide. Press Note No. 1, Dated 14-3-2022. The amended norms allow a start-up to issue convertible notes for a maximum period of 10 years, earlier, Start-up could issue convertible notes for a period of 5 years. A more defined and clear definition of the equity shares has been provided, the term ‘Body corporate’ has been added to the definition of the Indian Company, and specific provisions w.r.t to LIC have been added. This write up aims to discuss amendments made to NDI Rules in detail.

1. Amendment to Rule 2 (e), Convertible notes’ conversion period extended.

Amended norms allow a start-up to issue convertible notes which can be converted into the equity shares of the company within a period of 10 years. Under the extant norms, a start-up can issue a convertible note that can be converted into the equity shares of the company within a period of 5 years.

1.1 Meaning of ‘Convertible Note’

As per rule 2(e) A convertible note means a means an instrument issued by a start-up company acknowledging receipt of money initially as debt, repayable at the option of the holder, or which is convertible into such number of equity shares of that company, within a period not exceeding 10 years from the date of issue of the convertible note, upon occurrence of specified events as per other terms and conditions agreed and indicated in the instrument.

2. Inclusion of Body corporate in the definition of the Indian company

The extant norms defines the term ‘Indian Company’ as follows:

Indian company” means a company incorporated in India.

The amended rules has revised the definition of Indian Company. As per the amended rules, the term, ‘Indian Company’ shall mean:

“Indian company” means a company as defined in the Companies Act, 2013 or a body corporate established or constituted by or under any Central or State Act, which is incorporated in India.

Through this amendment, the Govt. has modified the definition of the Indian Company by including body corporates. After this amendment, body corporates established or constituted by or under any Central or State act will also be covered under the definition of Indian Company.

The amended NDI Rules further clarifies that reference to company ‘or’ Investee Company or ‘Transferee Company’ or ‘transferor company’ in these rules also includes a reference to a body corporate established or constituted by or under any Central or State Act.

The amended NDI rules expressly provide that an ‘Indian company’ does not include a society, trust or any entity, which is excluded as an eligible investee entity under the FDI Policy.

3. Introduction of new definitions namely “Share-Based Employee Benefit” and “Subsidiary” in line with modified FDI policy

The amended NDI rules specifically define two terms in line with the modified FDI policy as under:

(a) Share-Based Employee Benefit- means any issue of capital instrument to employees, pursuant to share based employee benefits scheme formulated by a body corporate established or constituted by or under any central or state act.

(b) Subsidiary- It shall have the same meaning as is assigned to it under the companies Act, 2013 as amended from time to time.

Earlier, these terms were not specifically provided. The specific mention of these terms will lead to more clarity. Now the Indian Company can also issue the Share-based employee benefits under rule 8 Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

4. Scope of rule 19 widened w.r.t Merger or demerger or amalgamation of Indian companies.

As per the amended NDI rules, the rule 19 which prescribes provisions relating to M&A of Indian Companies shall also be applicable in case

(a) where a scheme of compromise or arrangement is entered between two or more Indian companies or

(b) transfer of undertaking of one or more Indian company to another Indian company, or involving division of one or more Indian company,

The amended rules further clarifies that in case of mergers and acquisitions taking place in sectors under automatic route Government approval shall not be required.

5. Amendment to Schedule I, Certain activities will not be considered as real estate business

The modified NDI rules provides that the educational institutions, recreational facilities, city and regional level infrastructure, townships, real estate broking services shall not be considered as the real estate business. Earlier no such exclusions were provided.

6. Amendment in Schedule I, provisions w.r.t Life Insurance Corporation added.

The existing rules did not prescribe any specific provision w.r.t foreign investment in LIC. The Govt modified the FDI policy in March and allowed the FDI in LIC and prescribed the conditions thereof. The existing rules were not in line with the same, therefore, the amendments have been bought in the existing rules and specific provisions w.r.t FDI in LIC have been added to align the same with the modified FDI policy.