Foreign Exchange Management (Non-debt Instruments) Rules 2019 key changes


Foreign Exchange Management (Non-debt Instruments) Rules, 2019: key changes


On 17 October 2019, the Central Government notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) and the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Debt Instruments) Regulation, 2019 (DI Regulations) and the Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019 (collectively referred to as NDI and DI norms). The NDI and DI norms replace the existing Foreign Exchange Management (Transfer of 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 (ATIP).

In this update, we have discussed the key changes brought about by the NDI and DI norms.


Simplify the provisions governing foreign investment in India: the NDI Rules has neatly categorized the provisions relating to different investors and different types of transactions. For example, provisions relating to Overseas Citizens of India (OCI) and Non-Resident Indians (NRI) are now covered under a separate chapter. More importantly, the NDI Rules clearly distinguish between “debt instruments” and “non-debt instruments”, unlike its predecessor.

Vest the central government with power over non-debt instruments: the amendments to section 6 and 46 of the Foreign Exchange Management Act, 1999 (FEMA) (notified on 15 October 2019 through the Finance Act, 2015):

  • Vests the central government with the power to govern capital account transactions involving non-debt instruments.
  • Allows the central government to notify rules regulating the same. In exercise of this power, the central government notified the NDI Rules on 17 October 2019.

Vest the RBI with the power over debt instruments: the amendments to section 6 and 47 of the FEMA (notified on 15 October 2019 through the Finance Act, 2015):

  • Vests the RBI with the power to govern capital account transaction involving debt instruments only. Earlier, the power to govern every capital account transaction was with the RBI alone.
  • Allows the RBI to notify regulations governing debt instruments. In exercise of this power, the RBI notified the DI Regulations on 17 October 2019.

While the RBI has the power to notify regulations governing debt instruments, the power to notify the instruments which will be covered within the category of debt instruments remains with the central government. In exercise of its power, the central government notified a list of debt instruments and non-debt instruments on 16 October 2019. The list of instruments specified as non-debt instruments is exhaustive. Any instrument not specifically categorized as a non-debt instrument is deemed to be a debt instrument.

Key changes brought about by the NDI Rules

The key changes in the definition section of the NDI rules are:

Debt and non-debt instruments: the NDI Rules has defined debt and non-debt instruments. As per the definition, debt instruments mean all the instruments other than non-debt instruments. Non-debt instruments mean (i) all investments in equity instruments in incorporated entities: public, private, listed and unlisted; (ii) capital participation in LLP; (iii) all instruments of investment recognized in the FDI policy notified from time to time; (iv) investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts); (v) investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than 50% in equity; (vi) junior-most layer (i.e., equity tranche) of securitization structure; (vii) acquisition, sale or dealing directly in immovable property; (viii) contribution to trusts; and (ix) depository receipts issued against equity instruments. Earlier the acquisition and transfer of immovable property was governed by the ATIP. Under the NDI Rules, any dealing in immovable property by a person resident outside India will be treated as a non-debt instrument. In this case, the nonresident will have to comply with the provisions specified in Chapter IX of the NDI Rules.

Equity Instruments: the nomenclature of “capital instruments” has been replaced with the term “equity instruments” throughout the NDI Rules.

Hybrid Securities: The term has been newly inserted in the NDI Rules. Hybrid securities is defined 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 a trust to a person resident outside India. While the term hybrid securities has been defined, the term is not used elsewhere in the NDI Rules.

Investment Vehicle: The definition of Investment Vehicle has been modified. As per the new definition, any mutual fund investing more than 50% in equity will also be considered as an Investment Vehicle.

The key changes to the schedules of the NDI Rules are:

Schedule I (Purchase or sale of equity instruments of an Indian company by a person resident outside India)

  1. Under TISPRO and the NDI Rules, a non-resident can, in specific circumstances, be issued shares against pre-incorporation/preoperative expenses for a wholly-owned company incorporated by the non-resident in India. Under TISPRO, the company was required to furnish a certificate from the statutory auditor certifying the above, (along with form FC-GPR). The NDI Rules have removed this requirement.
  2. The NDI Rules have made the following amendments in the sectoral caps for total foreign investment:
  • E-commerce sector: The definition of E-commerce entity is amended by the NDI Rules. As per the NDI Rules, e-commerce entity means a company incorporated under the Companies Act (1956 or 2013). Earlier, the definition 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.
  • Single Brand Retail Sector: the sectoral cap and entry route for single brand product retail trading for foreign investment is reduced to 49% from 100% under the automatic route. Foreign investment beyond 49% will require government approval.

Schedule II (Investment by Foreign Portfolio Investors) (FPI)

  • With effect from 1 April 2020, the aggregate limit of investment by FPIs shall be the sectoral cap applicable to the Indian company.
  • The NDI Rules also give Indian companies the liberty to fix the aggregate limit for investment by FPIs. The limit can be fixed to 24% or 49% or 74%, provided the approval of the Board of Directors and shareholders (by special resolution) is taken. However, such resolutions must be passed before 31 March 2020 and once a higher threshold has been fixed, the same cannot be subsequently lowered.

Schedule III and IV (Investments by Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) on repatriation basis and non-repatriation basis)

The NDI Rules have relaxed the norms for NRI and OCI. The new norms include:

  • Permission for NRIs and OCIs (investing on a repatriable or nonrepatriable basis) to purchase or sell (without limit), units of domestic mutual funds. However, the NRIs/OCIs can only invest in mutual funds where the mutual funds invest more than 50% in equity of a company.
  • Permission for OCIs (investing on a repatriable basis) to subscribe to the National Pension System governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA). The subscribing OCI must be eligible to invest as per the provisions of the Pension Fund Regulatory and Development Authority Act, 2013.

Schedule V (Investments by other nonresident investors) Foreign Central Banks are now allowed to purchase the securities of an Indian company on the terms and conditions as may be specified by the RBI and Securities and Exchange Board of India.


With the notification of the NDI and DI norms, the framework for foreign investment in India has been largely simplified. Further, the NDI and DI norms clearly distinguish between debt and non-debt instruments and demarcate the authority responsible for each kind of instrument, i.e., the central government or the RBI. This clarity is likely to ease the approval process for investors.

It may also be pointed out that the NDI Rules do not encompass all press notes previously issued. Press note 4 in relation to FDI in coal mining, single brand retail, contract manufacturing and digital media has not been incorporated in the NDI Rules. Clarification on this point is awaited.