| Sr. No. |
Earlier Regulation |
Amendment in Regulation |
Our Comments |
| 1. |
Rule 2 (e) - Convertible note shall be repayable or converted into shares within a period not exceeding five years from the date of issue. |
in clause (e), for the words "five years", the words "ten years" shall be substituted |
This is a welcome move, as it shall provide some breather time for a start-up to set up their business and scale it to a sustainable level.
Thus, a period of 10 years for conversion or repayment of the convertible note shall bring in more flexibility for a new start-up. |
| 2. |
Rule 2 (k) – Explanation
(i) Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid. "Convertible debentures" means fully, compulsorily and mandatorily convertible debentures. "Preference shares" means fully, compulsorily and mandatorily convertible preference shares. Share Warrants are those issued by an Indian company in accordance with the regulations by the Securities and Exchange Board of India. Equity instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price. |
Substituted with the following explanation:
"(i) Equity shares issued by an Indian Company in accordance with the provisions of the Companies Act, 2013 or any other applicable law, shall include equity shares that have been partly paid. "Convertible debentures" means fully and mandatorily convertible debentures which are fully paid. "Preference shares" means fully and mandatorily convertible preference shares which are fully paid. "Share Warrants" are those issued by an Indian Company in accordance with the regulations made by the Securities and Exchange Board of India, the Companies Act, 2013 or any other applicable law. Equity instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price." |
The amendment has widened the meaning of Equity shares and share warrants. Hence, the equity instrument now covers equity shares and share warrants issued under the erstwhile Companies Act as well. |
| 3. |
Rule 2 (s) – Explanation
If a declaration is made by a person as per the provisions of the Companies Act, 2013 about a beneficial interest being held by a person resident outside India, then even though the investment may be made by a resident Indian citizen, the same shall be counted as foreign investment; |
Substituted with the following explanation:
If a declaration is made by a person as per the provisions of the Companies Act, 2013 or any other applicable law, as the case may be, about a beneficial interest being held by a person resident outside India, then even though the investment may be made by a resident Indian citizen, the same shall be counted as foreign investment;" |
Declaration of beneficial interest/ownership given under any other laws (e.g., LLP Act 2008, PMLA, etc.), shall now be considered as foreign investment. |
| 4. |
Rule 2 (y) "Indian company" means a company incorporated in India; |
Substituted with the following rule:
"(y) "Indian company" means a company as defined in the Companies Act, 2013 or a body corporate established or constituted by or under any Central or State Act, which is incorporated in India;
Note:
- It is clarified that reference to company or investee company or transferee company or transferor company in these rules also includes a reference to a body corporate established or constituted by or under any Central or State Act.
- It is further clarified that if the term Company or Indian company or Investee company or transferee company or transferor company is qualified by a reference to a company incorporated under the Companies Act, 2013 such term shall mean a company incorporated under the said Act but not a body corporate.
- It is also clarified that Indian company does not include a society, trust or any entity, which is excluded as an eligible investee entity under the FDI Policy."
|
- This amendment has widened the meaning of ‘Indian Company' for the purpose of interpreting the NDI Rules 2019.
- Pursuant to this amendment, now even a body corporate incorporated under any Central or State Act is considered as ‘Indian Company.'
- Accordingly, any reference to the term company or investee company or transferee company or transferor company' under the NDI Rules 2019 shall also include a reference to a body corporate established or constituted by or under any Central or State Act.
- However, where any specific qualified reference is made to a company incorporated under the Companies Act, 2013 only, then such term shall mean a company incorporated under the said Act only and not a body corporate.
- Furthermore, the term Indian Company shall exclude a society, trust and any entity which is not an eligible investee entity under the FDI policy.
|
| 5. |
Newly inserted |
after Rule 2 (am), the following clause shall be inserted, namely:
"(ama) "Share Based Employee Benefits" means issue of equity instruments to employees or directors or employees or directors of the holding company or joint venture or wholly owned overseas subsidiary or subsidiaries who are resident outside India, pursuant to Share Based Employee Benefits schemes formulated by an Indian Company"; |
The amendment has added the definition of "Share Based Employee Benefits,"i.e., Shares issued to employees under the ESOP scheme by the Indian Company. |
| 6. |
Newly inserted |
after Rule 2 (an), the following clause shall be inserted, namely:
"(ana) "subsidiary" shall have the same meaning as is assigned to it in the Companies Act, 2013, as amended from time to time"; |
The definition of a subsidiary is aligned with the meaning as defined under the Companies Act 2013. |
| 7. |
Rule 8. Issue of Employees Stock Options and sweat equity shares to persons resident outside India |
Issue of Employees Stock Options, sweat equity shares and "Share Based Employee Benefits" to persons resident outside India The term compromise or arrangement is added to the Rule 19 of NDI rules 2019.
The following note is added to Rule 19:
Note: Government approval shall not be required in case of mergers and acquisitions taking place in sectors under automatic route." |
The term ‘Share Based Employee Benefits' is added in Rule 8 of NDI rules 2019, pursuant to which an Indian Company can now issue shares under ‘Share Based Employee Benefits' to employees or directors or employees or directors of its holding company or joint venture or wholly-owned overseas subsidiary or subsidiaries who are resident outside India after complying with procedural norms like adhering to the sectoral cap, entry route restrictions, taking prior approval of RBI wherever applicable, etc. |
| 8. |
Rule 19 - Merger or demerger or amalgamation of Indian companies |
The term compromise or arrangement is added to the Rule 19 of NDI rules 2019.
The following note is added to Rule 19:
Note: Government approval shall not be required in case of mergers and acquisitions taking place in sectors under automatic route." |
With the addition of the term ‘compromise or arrangement' in the Rule 19, the scope of a merger or demerger or amalgamation has been widened and shall have the same reference in lines with the Indian Companies Act 2013.
Also, with the additional note, it has been clarified that merger or amalgamation taking place in sectors under automatic route shall not require government approval. |
| 9. |
Schedule I – para 2(f) – Explanation
Explanation: For the purpose of this rule, ‘real estate business shall not include development of townships, construction of residential or commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations, 2014. |
Substituted with the following explanation:
"Explanation: For the purpose of this rule, real estate business means dealing in land and immovable property with a view to earning profit from there and does not include development of townships, construction of residential or commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships, real estate broking services and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014 and earning of rent or income on lease of the property, not amounting to transfer.; |
With the detailed explanation, it is now clear what constitutes as ‘real estate business'.
Activities like the development of townships, construction of residential or commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships, real estate broking services are not considered as ‘real estate business,' thus, these entities can have FDI in it. |
| 10. |
New inserted |
The following sector is added:
FDI is allowed in Life Insurance Corporation of India (LIC) upto 20% under the automatic route. |
The Government has modified the FDI policy in March 2022 by allowing 20% of FDI in LIC under an automatic route and has prescribed conditions for it. Since the NDI rules did not have these provisions, it has been amended to align in line with the FDI policy. |
