top of page

Foreign Exchange Management (Non- Debt Instruments) Rules, 2019 - Explained


The Central Government on October 17, 2019 had issued a new notification, which introduced the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the "Rules"). Along with this, the Reserve Bank of India (RBI), also issued Foreign Exchange Management (Debt Instrument) Regulations, 2019 (the “Debt Regulations”), and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. The central government and the RBI exercised these powers in lieu of the section 46 and 47 respectively of FEMA regulations.

With the introduction of these new rules and regulations, the previous regulations named Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (the “TISPRO”) and Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 have been superseded.


The Central Government has exercised its powers that have been granted to it under sections 139, 143 and 144 of the Finance Act, 2015 (Notified Sections). The Notified sections, has clarified that the Central Government after consulting the RBI, has the power to frame rules for regulating transactions not involving debt instruments. The amendment also provides that the RBI will have to consult the Central Government before framing any rules for the purpose of regulating debt instruments. Also, the final power to notify the classes of debt instrument has now been given to the Central Government.

The very reason why the Central Government has come up with such new rules and regulations is to ensure that there should not be any conflict or overlapping of powers between the RBI and Central government while forming new regulations. This will also ensure that the foreign investment policies, which shall be made in future, shall be consistent, streamlined and any deadlocks between the Central Government and the RBI shall be avoided in the future.


1. Changes in definitions:

The term “capital instrument” has been replaced with the term “equity instruments” [rule 2(k)] in the Non Debt Instrument (NDI) rules. The equity instruments definition also includes within its ambit convertible debentures, which were originally defined under “capital instrument”.

Debt and Non Debt instruments have been distinguished in the new rules that have been notified. According to the new definition, debt instruments [rule 2(f)] mean all instruments other than non-debt instruments. Whereas , NDI [rule 2(ai)] include the following instruments (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 extant foreign direct investment policy notified from time to time (FDI Policy); 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; acquisition, sale or dealing directly in immovable property; (viii) contribution to trusts; and (ix) depository receipts issued against equity instruments.

A new definition of “Hybrid Instruments”[rule 2(x)] has been introduced which covers 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 trust to a person resident outside India. But the term is not been expressed anywhere in the latter part of the NDI rules or regulations as such.

The definitions of listed Indian Company [rule 2(ag)] and Sectoral cap [rule 2(am)] have been amended due to the addition of new definitions, equity instruments and debt instrument.

According to the amendment, now the term ‘investment vehicle’[rule 2(ae)] now includes mutual funds that invest more than 50% in Equity Instruments and which are governed by the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (Mutual Funds Regulations).

2. Non incorporation of Press Note -4(referred as PN 4)

The new amendment has not taken into consideration of PN-4 which was issued by the department of promotion of industry and internal trade ("DIPP"), which had brought changes to the FDI policy. The industries which were being affected by the PN-4 were the coal mining, single brand retail, and contract manufacturing and digital media. As the new rules have superseded TISPRO, the current position is that until and unless the government does not notify any changes with regard to PN-4 applicability, the relaxations stated in PN -4 are not in force.

3. Foreign Portfolio on Investments

As per the new rules the Foreign Portfolio Investments (FPI) shall be revised from 1 April, 2020. It also states that the companies which had decreased its aggregate limit to 24% or 49% or 74%, are allowed to increase such aggregate limit to 49% or 74% or according to the sectoral cap or statutory ceiling respectively. After, the approval of its board of directors and its members, through a resolution and a special resolution, respectively, the same can be increased. Once the limit is set, it cannot be reduced further. If the company wishes to decrease the FPI limit, it must be done so before March 30, 2020, subject to the restrictions which have been specified. (stated in schedule II)

4. Benefits to Non Resident Indians (NRIs) and Overseas Citizen of India (OCI)

The new rules permit the NRIs and OCI to enroll in the National Pension Scheme. Further, NRIs and OCI can trade units of domestic funds in which investment is more than 50%. (stated in schedule III)

5. Prerequisites for E-commerce companies

The new rules state that an e- commerce company can only be permitted to operate if it is a company which has been incorporated or existing under the Companies Act, 2013 or Companies Act 1956 [rule 2(an)]. The definition of e- Commerce Company does not include companies which have been incorporated under rule 2 (42) of the Companies Act, 2013 or an office, branch or agency in India owned or controlled by a person resident outside India and conducting the e-commerce business.

6. Clarification on transfers

The rules have clarified that the transactions of equity instruments which are held on a non-repatriation basis and wants to transfer it to someone for repatriation basis, it is important that the transferee must have complied with the requirements of pricing and sectoral caps(as required for non-repartition use). (stated in schedule IV)

7. Foreign venture capital institutions (FVCI)

The FVCI’s have been permitted to invest in debt and equity instruments of the Indian startups irrespective of the sector in which it is involved into. But a caveat has been given, that if investment is made in equity instrument, then the rules with regard to sectoral caps, entry routes must be complied with. (stated in Schedule VII)

8. Pricing Guidelines not applicable

The requirement for dealing with the determination of price or in other words the conversion formula of convertible instrument is no longer required. The price can be determined upfront or it must be determined not before 30 days of the date on which the holder of convertible security becomes entitled to apply for shares. (stated in rule 21)

9. Debt regulations

The investments with regard to investments by NRI, FPI, OCI, foreign central banks, and multilateral development banks, in government securities, debt, non-convertible debentures, and security receipts have been shifted to the Debt regulation. As a caveat, it must be noted that these transactions are not External Commercial Borrowing (ECB).


Even though the new rules and regulations try to bring the Central Government and the RBI together for unifying the decision making process with regard to foreign transactions, but there are certain concerns with regard to the same. The Central Government has taken away the decision making powers of the RBI. Any decision that is taken by the RBI, needs the consultation with the Central for the same. Thus, making the RBI a mere regulatory authority. The addition of new definitions has resulted in confusion as to how the non-convertible, optionally convertible or partially convertible preference shares shall be treated as they have been brought under the same definition as the other securities, unlike TISPRO which had different definitions for such convertible securities. The non-implementation of PN-4 has resulted in the confusion whether the PN-4 has been superseded or not. The Convertible Notes which form an essential part of the equity instruments have been left out in the definitions. Therefore, it is still not clear whether at the time of issuing the Convertible Notes, Fair Market Value can be used for the purpose of reference for conversion of the Convertible Notes or the holder of Convertible Note needs to meet the Face Market Value for such Convertible Notes at the time of conversion. These are some of the questions that have been left unanswered by the Central Government and the RBI. However, it is felt that further amendments by the Central Government and RBI shall fill the voids with regard to the questions in the future.

785 views0 comments


bottom of page