This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our PRIVACY POLICY for more information on the cookies we use and how to delete or block them.

Regulatory Alert: Amendment in FDI (Non-debt Instruments) Rules, 2019

29 April 2020


The Central Government vide existing Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘FDI Rules’) permits non-resident persons to make investments in India. After adding amendments to prevent hostile takeovers/acquisition of Indian companies by restricting the investment by non-resident investors based in countries that share land border with India vide notification[1] dated 22 April 2020, the Government has further amended FDI Rules vide notification[2] dated 27 April 2020. This notification has come into force with immediate effect.

Highlights of the amendment in FDI Rules are as under:

1. Acquisition through renunciation of rights

The general pricing guidelines under FDI Rules require any issue or transfer of shares to a person resident outside India to be at a price which shall be not less than (i) the price worked out in accordance with the SEBI guidelines (in case of a listed Indian company) or (ii) the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker registered with the SEBI or a practising Cost Accountant (in case unlisted company).

A new Rule 7A has been inserted to provide that a person resident outside India who has acquired a right from a person resident in India (who has renounced it) may acquire equity instruments (other than share warrants) against the said rights as per the general pricing guidelines applicable in case of issue or transfer of shares.

2. Sourcing Norms under Single Brand Retail Trade (SBRT)

In case of foreign investment in SBRT beyond 51%, there is a mandatory annual sourcing requirement of 30% of the value of goods purchased from India preferably from MSMEs, village and cottage industries, artisans and craftsmen. These sourcing norms shall not be applicable up to 3 years from commencement of the business i.e. opening of the first store in cases of products having 'state-of-art' and 'cutting-edge’ technology.

SBRT entities are permitted to undertake retail trading through e-commerce. As per the amendment, this exemption of sourcing requirements is now available for up to 3 years from the commencement of business i.e. opening of the first store or start of online retail, whichever is earlier.

3. Sectoral Cap for Insurance Sector and related conditions

The sectoral cap for insurance sector has now been bifurcated into two parts:

Sector/ Activity

Sectoral Cap

Entry Route


Insurance Company



No change

Intermediaries or Insurance Intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, surveyors and loss assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority of India from time to time.



Sectoral cap revised from 49% to 100%


The government has also prescribed certain conditions related to ownership & control of Indian insurance company by resident Indian entities and operational aspects of insurance intermediaries such as prior IRDAI approval for repatriating dividend, no payments to the foreign group or promoter or subsidiary or interconnected or associate entities beyond the limits prescribed by IRDAI.

4. Disinvestment by Foreign Portfolio Investors (FPIs)

The FPIs may purchase or sell equity instruments of an Indian company listed or to be listed on a recognised stock exchange in India subject to the condition that the total holding by each FPI or an investor group, shall be less than 10% of the total paid-up equity capital on a fully diluted basis or less than 10% of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company.

Also, it has been prescribed that the FPIs investing in breach of the above prescribed limit have the option:

  • To divest the excess holdings within 5 trading days from the date of settlement of the trades causing the breach and bring the same to the notice of the depositories as well as the concerned company for effecting necessary changes in their records, within 7 trading days from the date of settlement of the trades causing the breach; or
  • Not to divest and the entire investment in the company by such FPI and its investor group shall be considered as investment under Foreign Direct Investment (FDI) and the FPI and its investor group shall not make further portfolio investment in the concerned company

Now the central government has notified that any conditions specified by SEBI and the RBI in either case of the divestment of holdings by the FPI or the reclassification of FPI investment as FDI shall be additionally complied with by the FPIs.

BDO Comments:

The FDI Policy amendment will require a company that is issuing rights to non-resident shareholders who has acquired a right from a resident shareholder (who has renounced it) to adhere to general pricing guidelines of FDI rules. Regarding the change in the sectoral cap of insurance intermediaries and opening of FDI in the insurance sector, the same is in line with the government’s promise in Budget 2019 (No.2) as presented by the Finance Minister Nirmala Sitharaman. This change would provide boost to insurance intermediaries and the sector.