(Team IELR)
The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules), Schedule I, rule 1(1)(d)(i) restricted share swaps in cross-border M&A transactions to primary share swaps, meaning that shares had to be newly issued by an Indian company as part of the transaction. This excluded secondary market transactions, where existing shares are transferred rather than newly issued, limiting the options for structuring such deals. However, with the insertion of rule 9A by the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (NDI Amendment), the possibility of “transfer” of equity instruments is now allowed, effectively allowing secondary market transactions in share swaps. This change significantly enhances the flexibility of cross-border M&A transactions.
Further, the NDI Amendment to Schedule I, rule 1(1)(d)(iv) also clarifies that an Indian company can now issue its equity instruments to a non-resident in exchange for the “equity capital” of a foreign company. The erstwhile rule restricted the issuance of equity instruments against swaps of equity instruments in Indian companies, creating uncertainty about whether foreign shares could be involved in such transactions. This amendment aligns the NDI Rules with the Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules), Schedule I, rule 1(2)(v), Foreign Exchange Management (Overseas Investment) Regulations, 2022 (OI Regulations), rule 8, and Foreign Exchange Management (Overseas Investment) Directions, 2022 (OI Directions), rule 22 (collectively, OI Framework), which already permit Indian companies to engage in overseas investments by swapping securities, thereby broadening the scope of permissible transactions.
These amendments bring much-needed consistency between the NDI Rules and the OI Framework, resolving previous discrepancies. By allowing both primary issuance and secondary transfers, and by permitting swaps involving foreign equity capital, the updated NDI Rules now provide clearer and more flexible guidelines for cross-border M&A transactions, aligning domestic and international investment regulations.
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