FDI & ODI Swap following Budget 2024

Quick Summary

In the 2024 Union Budget, the Indian government introduced a significant amendment to the Foreign Exchange Management Act (FEMA) (Non-debt Instruments) Rules, 2019, facilitating Foreign Direct Investment (FDI) and Overseas Direct Investment (ODI) swaps. This provision allows investors to exchange their FDI in Indian entities for ODI in foreign entities, streamlining cross-border investment processes. Key changes include the exclusion of investments by Overseas Citizens of India (OCIs) on a non-repatriation basis from indirect foreign investment calculations, removal of the 49% aggregate cap on Foreign Portfolio Investors (FPIs), and the recognition of ‘White Label ATM Operations’ as a new sector with 100% FDI permitted. These reforms aim to enhance investment flexibility and attract more global investors to India’s evolving financial landscape.

Following the recent budget announcement, which aimed to simplify regulations for Foreign Direct Investment (FDI) and Overseas Investment (ODI), the Department of Economic Affairs has amended the FEMA (Non-debt Instruments) Rules 2019. A significant aspect of this amendment is the introduction of a new provision that enables FDI-ODI swaps. We have curated a slide below to help you understand this better.

Broad Mechanics

  1. Foreign Company A holding shares in Foreign Company B.
  2. Foreign Company A transferring shares of Foreign Company B to Indian Company.
  3. Indian Company issuing its shares to Foreign Company A as consideration for acquiring shares of Foreign Company B.
  4. Indian Company is the new holding company of Foreign Company B.

Indian Company now permitted to acquire shares of a Foreign Company under ODI Rules via the swap route.
i.e., Consideration for purchase of shares of Foreign Company B from Foreign Company A can be discharged by way of issuing its own equity shares to Foreign Company A.

FDI & ODI Swap following Budget 2024

๐˜–๐˜ต๐˜ฉ๐˜ฆ๐˜ณ ๐˜ข๐˜ฎ๐˜ฆ๐˜ฏ๐˜ฅ๐˜ฎ๐˜ฆ๐˜ฏ๐˜ต๐˜ด:

1. Investment by OCIs on non-repat basis ๐ž๐ฑ๐œ๐ฅ๐ฎ๐๐ž๐ from calculation of indirect foreign investment. Earlier only NRI investment was excluded.

2. Aggregate FPI cap of 49% of paid-up capital on a fully diluted basis has now been removed. FPIs now required to ๐จ๐ง๐ฅ๐ฒ ๐œ๐จ๐ฆ๐ฉ๐ฅ๐ฒ ๐ฐ๐ข๐ญ๐ก ๐ฌ๐ž๐œ๐ญ๐จ๐ซ๐š๐ฅ ๐จ๐ซ ๐ฌ๐ญ๐š๐ญ๐ฎ๐ญ๐จ๐ซ๐ฒ ๐œ๐š๐ฉ.

3. ‘White Label ATM Operations’ has been recognized as a new sector, with 100% ๐…๐ƒ๐ˆ ๐ง๐จ๐ฐ ๐š๐ฅ๐ฅ๐จ๐ฐ๐ž๐ ๐ฎ๐ง๐๐ž๐ซ ๐ญ๐ก๐ž ๐š๐ฎ๐ญ๐จ๐ฆ๐š๐ญ๐ข๐œ ๐ซ๐จ๐ฎ๐ญ๐ž.

Key Indian players in this sector: India1 Payments, Indicash ATM (Tata Communications), Vakrangee, and Hitachi Payments.

4. NR to NR transfer will require prior Govt approval ๐ฐ๐ก๐ž๐ซ๐ž๐ฏ๐ž๐ซ ๐š๐ฉ๐ฉ๐ฅ๐ข๐œ๐š๐›๐ฅ๐ž. In the erstwhile provisions, it was required only if investment in the specific sector required prior Govt approval.

5. Definitions – Control now defined in Rule 2, and definition of “startup company” has been aligned with “startups” recognised by DPIIT vide notification dated February 19, 2019. Definitions of “control” and “startup company” elsewhere have been deleted.

About the Author
Jitesh Agarwal
Jitesh Agarwal
Founder | [email protected]

Leads the VCFO, finance tax, and regulatory functions at Treelife. Responsible for the firmโ€™s non-operational growth and providing strategic advisory in GIFT City, helping clients navigate complex regulatory landscapes effectively.

Priya Kapasi Shah
Priya Kapasi Shah
Associate Partner | Tax & Regulatory | [email protected]

Heads Treelifeโ€™s Financial Advisory practice, specializing in investment structuring, cross-border transactions, and tax and regulatory advisory. Also leads on AIF setups and advisory services for GIFT IFSC.

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