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To ease and boost foreign direct investment, the Ministry of Finance in August 2024 issued amendments to the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (). These have eased share swaps as a form of non-debt, equity-based foreign investment. They allow both primary issues and secondary transfers of shares in an Indian company in exchange for equity capital in a foreign company.

Supporting 含羞草社区 aim to create a more foreign investor-friendly environment, this attempt seems to be an expansion of the list of permissible structures under the automatic route. However, it has to be questioned whether these amendments have introduced advantages not permitted before.

The amendment adds rule 9A to the NDI rules. This provides for the transfer of equity instruments of an Indian company between a resident and a non-resident against a swap of equity instruments of another Indian company and against a swap of equity capital of a foreign company.

Before the amendment, only equity instruments, defined as equity shares, convertible debentures, preference shares and share warrants issued by an Indian company, could be issued to a non-resident and only in exchange for the equity instruments of another Indian company. The regulations allowed primary issues only and excluded secondary transfers.

The history of the legislation shows that before 2015 rule 3(c) of the , provided that share swap transactions could only be undertaken with the prior approval of the government. However, Press Note 12, 2015, amended the regulations to allow share swaps by way of primary issues without such approval in sectors using the automatic route. This was also accepted under the . This position was retained in the NDI rules and the .

All the relaxations outlined above related solely to primary issues, and it was therefore assumed that all secondary share swap transactions required prior government approval. The 2024 amendment, however, allows secondary transfers along with primary issuances and has made the following structures possible for an Indian company.

The company may issue shares in exchange for equity capital of a foreign company; it can transfer the shares of another Indian company to foreign investors in exchange for shares in a third Indian company; it may transfer the shares of another Indian company to foreign investors in exchange for shares of a foreign company, and it can transfer shares of a foreign company to foreign investors in exchange for shares of an Indian company.

Although such structures seem novel, it is not entirely accurate to describe them as such. These arrangements have always been possible under the automatic route, albeit not through share swaps of themselves, but by using cash as consideration. Ignoring legalities and terminology, such structures have always been allowed if consideration is excluded as a factor to determine their legality.

For instance, it was permissible for a foreign investor to hold shares in an Indian entity or for an Indian investor to hold shares in a foreign entity through a secondary transfer if the consideration was cash rather than kind. Such transactions would have resulted in a shareholding arrangement similar to that to be allowed through share swaps.

Because consideration in a share swap transaction is the issue or transfer of securities, not cash, it is an efficient method for companies with liquidity constraints to make expensive acquisitions. Early-stage startups have limited cash, and bigger companies may want to preserve cash for operational expenses. Efficient investment demands that such share swaps be allowed and compliance made easier.

That such transactions are commonly implemented in other jurisdictions without undue government intervention says much about the government’s hesitation to relax its control of foreign investment. As investor sophistication increases, further liberalisation becomes more important than a paternalistic desire to safeguard investors from their presumed naivety. The 2024 amendment to the NDI rules is therefore a most welcome change.

Manish Gupta is a partner, Rashi Singh is a principal associate and Ananya Vajpey is an associate at Shardul Amarchand Mangaldas & Co.