The RBI, on January 20, 2025, has released further updates to the Master Directions on Foreign Investments in India (‘Master Directions’), providing clarity on the exchange control framework in India, with a focus on downstream investments. The changes introduced therein were primarily aimed at aligning the Master Directions with the amendments made to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’) on August 16, 2024. In addition to the aforementioned changes, the following additional clarifications were added to the Master Directions:

i.    Clarification on Downstream Investments: The Master Directions now expressly clarify that a foreign owned and controlled company (‘FOCC’) can make downstream investment through equity share swap, deferred payments and such arrangements which are available to non-residents under the NDI Rules provided that the same is done in compliance with Rule 23 of the NDI Rules which deals with restrictions on use of borrowed funds for downstream investment;

ii.   Acquisition Through Rights Issue: Under Section 62(1)(a)(iii) of the Companies Act, 2013, a company may dispose the unsubscribed portion of the shares in a rights issue in a manner that does not lead to any disadvantage for the company. The Master Directions have now clarified that such unsubscribed portion may be issued as equity instruments to persons resident outside India as well (except overseas corporate bodies), provided that such issuance is in compliance with the NDI Rules;

iii.  Investment by Permissible Holder: A person categorized as permissible holder under the NDI Rules can invest in equity shares of public companies incorporated in India and listed on international exchanges under the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme notified by the Central Government. The amount in relation to the aforesaid investment will be paid as inward remittance from abroad or through banking channels to foreign currency account held in compliance with the Foreign Currency Accounts Regulations as amended from time to time. A permissible holder is allowed to remit outside India or credit to their bank account (maintained in accordance with the Foreign Currency Accounts Regulations) the proceeds of sale of the aforesaid equity shares;

iv.   Clarification to Minimum Net Owned Fund Criteria: Under the NDI Rules, for investments into a company whose activities are regulated by a financial sector regulator, a criteria for minimum Net Owned Fund (‘NOF’) is to be fulfilled. Pursuant to the update, it has been clarified that such aforementioned company, may obtain foreign investment to meet the requirement of the minimum NOF. Foreign investment so received, must only be used for meeting the minimum NOF criteria. In case the requisite license is not granted by the regulator, the money so received should be repatriated to the investee company;

v.    Form DI Filing: An explanation has been added to paragraph 9.1.15 of Master Directions to clarify that an investment originally made by a resident investee entity needs to be reclassified if such entity becomes an FOCC and the same is required to be reported in Form DI within 30 days of such entity becoming an FOCC; and

vi.   Transfer on Deferred Payment Basis, under Indemnification or Escrow: The Master Directions capture an additional note to state that any transaction which entails deferred payments / indemnification / escrow arrangements should be specifically captured in the share purchase/ share transfer agreement.