India - Amendment To The Foreign Investment Rules: Harmonizing The Regulatory Landscape.

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India - Amendment To The Foreign Investment Rules: Harmonizing The Regulatory Landscape.


8 May 2020


Asia Pacific Legal Updates





On April 27, 2020, the Ministry of Finance notified the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 20201 (the “Amendment”) to amend the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (the “Rules”).


The Amendment introduces changes with respect to (i) acquisition of shares by way of rights issue after renunciation by an existing shareholder; (ii) sourcing norms for Single Brand Retail Trading ("SBRT”); (iii) relaxations for foreign investment in the insurance sector; and (iv) clarifications with respect to foreign portfolio investors (“FPIs”). Considering the current political and economic landscape in our country, these changes were introduced with the intention of harmonizing and clarifying certain foreign investment norms.




The key changes are discussed below:


2.1. Acquisition through a renunciation of rights


Under the earlier regime, only non-resident shareholders2 (in addition to resident investors or shareholders) were entitled to receive renunciation of rights entitlement of equity instruments (except share warrants), from the person to whom it was initially offered, at:


(a) a price determined by the company (for listed entities); and


(b) a price not lesser than the price offered to the resident shareholders (for unlisted entities).


The Amendment, by insertion of Rule 7A, has now permitted any non-resident person to acquire a right to subscribe to equity instrument (except share warrants) by way of renunciation of rights entitlement from a resident shareholder, subject to compliance with the pricing guidelines as detailed out under rule 21 of the Rules (as applicable to listed and unlisted entities).


2.2. Single Brand Retail Trading


Prior to the Amendment, entities undertaking SBRT of products having 'state-of-art' and 'cutting-edge' technology and where local sourcing was not possible, were not required to follow the sourcing norms as prescribed under the Rules, for a period of 3 years (“exemption period”) from the commencement of its first store.


Post the Amendment, the exemption period for the said entities will now be calculated from the commencement of the entity’s first store or from the start of online retail, whichever is earlier.


2.3. Insurance Sector


Earlier this year, press note 1 of 2020 dated February 21, 2020 (“Press Note”), was released by the Department for Promotion of Industry and Internal Trade (“DIPP”). By virtue of this Press Note, the permitted sectoral cap of foreign investment in (i) insurance companies; and (ii) intermediaries in the insurance sector were differentiated.


Further, certain additional conditionalities were also introduced to align the Press Note with the regulations previously issued by the Insurance Regulatory and Development Authority of India (“IRDA”)3 and Reserve Bank of India (“RBI”)4 .


The changes contained in the Press Note were to come into effect only from the date of amendment to the Rules. Accordingly, through this Amendment, the Ministry of Finance has given effect to the relaxations on foreign investment to the insurance sector. We have summarized the changes below:


2.3.1. Insurance Companies


The sectoral limit for foreign direct investment (“FDI”) into insurance companies remain at 49% (forty nine percent) under the automatic route. The Amendment has introduced the following additional conditions for foreign investment in insurance companies:


(a) No Indian insurance company shall allow the aggregate holdings by way of total foreign investment in its equity shares by foreign investors, including portfolio investors, to exceed 49% (forty nine percent) of its paid-up equity capital.


(b) Such foreign investment up to 49% (forty nine percent) of the total paid-up equity of the Indian insurance company shall be allowed under the automatic route, subject to approval or verification by the IRDA.


(c) An Indian insurance company shall ensure that its ownership and control remain at all times in the hands of resident Indian entities as determined by the Department of Financial Services or IRDA as per the rules or regulations issued by them from time to time.


(d) Foreign portfolio investment in an Indian insurance company shall be governed by the relevant provisions contained in the Rules5 and provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.


(e) Any increase in foreign investment in an Indian insurance company shall be in accordance with the pricing guidelines specified in the Rules.


2.3.2. Intermediaries in the Insurance Sector


According to the Amendment, the sectoral limit for foreign investment into intermediaries or insurance intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, surveyors and loss assessors and other entities as notified by the IRDA (together referred to as “Intermediaries”) is now revised to 100% (one hundred percent) under the automatic route.


While the FDI cap of 100 per cent is subject to the same terms and conditions as applicable to insurance companies, the condition regarding Indian owned and controlled (as specified in clause 2.3.1(c) above) shall not apply to Intermediaries. The composition of the board of directors and key management persons of such Intermediaries shall be as specified by the concerned regulators from time to time.


Further, the FDI proposals shall be subject to verification by the IRDA and such investment into Intermediaries will be governed by the relevant provisions6 of the Indian Insurance Companies (Foreign Investment) Rules, 2015, as amended from time to time.


Insurance Intermediaries, in which a majority shareholding is held by foreign investors, is also required to comply with the following:


(a) be incorporated as a limited company under the provisions of the Companies Act, 2013.


(b) at least one from among the Chairman of the Board of Directors, Chief Executive Officer, Principal Officer or Managing Director shall be a resident Indian citizen.


(c) obtain the prior permission of the IRDA for repatriating dividend.


(d) bring in the latest technological, managerial and other skills.


(e) not make payments to the foreign group, promoter, subsidiary, interconnected or associate entities beyond what is necessary or permitted by the IRDA.


(f) make disclosures in the formats to be specified by the IRDA of all payments made to its group, promoter, subsidiary, interconnected or associate entities.


(g) composition of the board of directors and key management persons shall be as specified by the concerned regulators.


2.4. Investment by FPI


According to the Rules, for FPI investments that are in breach of the limits prescribed under the Rules, such FPI’s shall have the option of divesting their holding within 5 (five) trading days from the date of settlement of the trades causing the breach. In the event the FPI chooses not to divest, then the entire investment in the company by such FPI and its investor groups shall be treated as FDI.


The Amendment now includes a clarificatory language to the relevant provision7 , which states that: “The divestment of holdings by the FPI and the reclassification of FPI investment as FDI shall be subject to further conditions, if any, specified by Securities and Exchange Board of India and the Reserve Bank in this regard.”




Among all the changes introduced under this Amendment, the partial liberalization of the insurance sector is a significant move. The relaxations have been welcomed by stakeholders at large as it will now encourage and attract foreign investment. With the existing liquidity crunch due to the on-going pandemic, this timely move by the government will provide much needed respite for companies in the insurance sector looking to raise capital. 


herbert smith Freehills

For further information, please contact:

Ravi Dubey, Induslaw