The Ministry of Finance on April 27, 2020 amended, for the second time, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“Non-Debt Rules”) by notifying the Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules, 2020 (“Amendment Rules”).

The Amendment Rules pertain broadly to: (a) clarification on acquisition of equity instruments renounced by a resident holder in favour of a non-resident holder pursuant to a rights issue; (b) clarification on single brand retail trading entities engaged in online retail trade; (c) liberalization of Foreign Director Investment (“FDI”) in the insurance sector; and (d) clarification on purchase of equity instruments by Foreign Portfolio Investors (“FPI Investors”).

Set out below is a brief summary of the aforesaid changes.

Renunciation of Rights by a Resident in Favour of a Non-resident

Until recently, the Non-Debt Rules through an explanation provided that the conditionalities applicable to a rights issue (such as it has to be in compliance with the Companies Act, 2013 (“Act”), sectoral caps, pricing conditions, etc) equally apply to cases where a person resident outside India makes an investment following a renunciation of rights in its favour by the person who was originally entitled to such rights.

The Amendment Rules, however, omit the aforesaid explanation and replace it by a new Rule 7A to the Non-Debt Rules. The new Rule 7A provides that a person resident outside India has a right to acquire equity instruments (other than share warrants) in an Indian company from a person resident in India who has renounced its rights in accordance with the pricing guidelines specified under Non-Debt Rules (emphasis supplied).

The aforesaid amendment appears to have been made to ensure that there is no circumvention of the overarching principal of applicability of the ‘fair market value’ pricing guidelines to any issuance of shares to non-residents. This also clears the air on whether the pricing principle enumerated in the rights issue provisions (which provides that issuance to non-residents shall not be at a price lower than that offered to residents) would apply in all scenarios. Clearly, the Government looks at renunciation of rights by a resident in favour of a non-resident as being a transaction at par with an issuance of shares to non-residents through a private placement route.

It is also pertinent to note that while the omitted explanation under Rule 7 of the Non-Debt Rules regulated the investments made through renunciation of rights by any person (irrespective of the residential status of such person), the ambit of applicability of Rule 7A has been restricted to apply only to renunciation of rights by a person resident in India (emphasis supplied).

Single Brand Product Retail Trading

While the Non-Debt Rules allow a single brand retail trading entity operating through brick and mortar stores to undertake retail trading through e-commerce, there been ambiguity with respect to the applicability of the mandatory sourcing requirement of 30% of purchases from India (“Sourcing Norms”), particularly in scenarios where an entity commenced retail trading through e-commerce before setting up any brick and mortar stores. To elucidate, until now, the Non-Debt Rules only exempted a single brand retail trading entity from complying with the Sourcing Norms for 3 (three) years from commencement of the business, i.e., opening of the first store for entities undertaking single brand retail trading of products.

The Finance Minister in the budget speech in 2019 had committed to easing of the local sourcing norms for FDI in single brand retail sector.[1] The amendments brought herein via the Amendment Rules are to reflect this – it has now been clarified that a single brand retail entity shall be exempt from complying with the Sourcing Norms for 3 (three) years from opening of the first store or “start of online retail, whichever is earlier”.

This may turn out to be a blessing in disguise for single brand retail entities as the COVID-19 pandemic may alter the consumer shopping pattern and in the foreseeable future, consumers may shift towards online retail as opposed to the traditional offline / brick and mortar route.

Liberalisation of the Insurance Sector

In the budget speech, the Finance Minister had also stated that 100% FDI would be allowed under the automatic route in insurance intermediaries.[2] Further to the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2019[3] and Press Note 1[4], the Amendment Rules notify that FDI in the insurance intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third-party administrator, surveyors, loss assessors and any such entities, as may be notified by Insurance Regulatory and Development Authority (“IRDAI”), shall be permitted up to 100% through the automatic route.

The FDI in such intermediaries will, however be subject to certain conditions including the following:

  1. Such FDI in insurance intermediaries shall be made subject to verification by IRDAI;
  2. Such insurance intermediary shall be incorporated as a limited company under the provisions of the 2013 Act;
  3. At least one individual amongst the chairman of the board of directors or the chief executive officer or principal officer or the managing director shall be a resident Indian citizen;
  4. Prior permission of the IRDAI for repatriating dividend shall be obtained;
  5. Latest technological, managerial and other skills shall be used;
  6. No payments shall be made to the foreign group or its affiliates beyond what is necessary or permitted by the IRDAI; and
  7. Disclosures shall be made in the formats specified by the IRDAI of all the payments made to its group, or promoter, or subsidiary

Purchase of equity instruments by FPI

The Non-Debt Rules allow a Foreign Portfolio Investor (“FPI Investor”) 5 (five) trading days from the date of settlement of the trades to divest its holdings in case the applicable ceiling limit on Foreign Portfolio Investment (“FPI”) is breached. If the FPI Investor does not divest its holdings within the prescribed time limit, the entire FPI investment is to be classified as FDI, and such FPI Investor is not allowed to make further investments under the FPI route.

In this regard, the Amendment Rules have provided SEBI and the RBI with adequate powers to provide guidelines for the reclassifications of FPI investments. This appears to have been done to give flexibility in Covid 19 times to SEBI and RBI.


[2] Id. At paragraph 38(b). See also:

[3] Indian Insurance Companies (Foreign Investment) Amendment Rules, 2019 issued vide Notification No. G.S.R. 619(E) dated 2 September 2019 See also:

[4] Press Note 1 issued by the Department for Promotion of Industry and Internal Trade on 21 February 2020. See also:


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