The government has made it easier to exchange shares across borders

India’s Finance Ministry on Friday announced key changes to foreign exchange (Forex) regulations, including mandatory government approval for all investments originating from countries sharing land borders with India.

The latest changes also aim to simplify cross-border share exchanges and standardise key definitions such as “control”.

The updated rules have aligned the treatment of downstream investments by entities owned by Overseas Citizens of India (OCI) with investments owned by Non-Resident Indians (NRIs) on a non-repatriation basis.

This is aimed at increasing the share of NRI funds in the Indian market.

“These (amendments) will facilitate global expansion of Indian companies through mergers, acquisitions and other strategic initiatives, enabling them to reach out to new markets and increase their presence across the globe,” said a finance ministry statement on Friday announcing amendments to the Foreign Exchange Management Act (FEMA).

It is particularly important to clarify the issue of government approval of investments.

Previously, such approvals were required only if the Indian company operated in a sector where foreign investment was subject to government control.

As Mayank Arora, Chief Regulatory Affairs Officer at Nangia Andersen India, explained, the new changes mean that any transaction involving countries sharing land borders with India will require government approval, irrespective of the sector in question.

The amended regulations also clarified the situation for OCI.

“The relaxation in rules available to Non-Resident Indians (NRIs) where investments made on non-repatriation basis are not considered as Foreign Direct Investment (FDI) has now been extended to OCI,” said Rajesh Gandhi, Partner, Deloitte.

Another key change is the unification of the definition of “control” to ensure consistency across different laws and regulations.

The rules currently provide that two or more foreign portfolio investors (FPIs), including foreign governments, will be deemed to be part of an investor group if they have joint control of more than 50 per cent.

“These changes underline the government’s commitment to creating a friendly climate for foreign investors through ongoing efforts to simplify regulations and make it easier to do business,” the Ministry of Finance said in a statement.

The decision follows the July 23 budget announcement, which stated: “The rules and regulations relating to foreign direct investment and foreign investment will be simplified to facilitate foreign direct investment, promote priorities and opportunities for use of the Indian rupee as a currency for foreign investment.”

The Foreign Exchange Management Act (FEMA) also contains a revised definition of ‘start-up’, aligned with the latest notification of the Department for Promotion of Industry and Internal Trade (DPIIT).

As per the latest DPIIT notification, the turnover threshold required to classify a company as a startup has been increased from Rs 250 million to Rs 1 lakh.

Additionally, startups will continue to be recognized as such for up to 10 years from their date of founding.

“This alignment of the startup definition with the broader DPIIT framework provides clarity on the status of startups for the purpose of foreign direct investment and will make such startups more attractive to foreign investors,” Arora said.

Detailed provisions regarding the exchange of capital shares were also introduced.

This enables share exchanges even in cases where government approval is required, regardless of the sector or geographic origin of the foreign investor.

Such changes will only be allowed with government approval.

The definition of equity has also been updated to align with the latest Foreign Exchange Management (Overseas Investment) Rules, 2022.