The Ministry of Finance has notified an amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, allowing Indian companies operating in sectors where Foreign Direct Investment (FDI) is prohibited to issue bonus shares to existing foreign shareholders, subject to specific conditions.
The Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2025, were notified via S.O. 2549(E) on June 11, 2025, and took effect immediately upon publication in the Official Gazette.
Key Amendment
The amendment inserts sub-rule (2) under Rule 7, clarifying that:
"An Indian company, engaged in a sector or activity prohibited for foreign direct investment, may issue bonus shares to its pre-existing shareholders who are persons resident outside India, provided that the shareholding pattern is not altered by such issuance."
Additionally, the amendment validates past issuances of bonus shares to foreign shareholders in these restricted sectors by deeming them to have been issued in compliance with applicable FEMA regulations or previous RBI frameworks, such as:
- FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000
- FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017
Implications
This move is expected to offer regulatory clarity and relief to companies with legacy foreign investments in restricted sectors such as multi-brand retail, atomic energy, or lottery businesses. It ensures that bonus shares issued to foreign shareholders will not be treated as a violation of the FDI policy, as long as ownership percentages remain unchanged.
Background
The FEMA (Non-debt Instruments) Rules, 2019, which replaced earlier RBI regulations governing capital account transactions, have undergone multiple amendments to keep pace with evolving investment dynamics. This 2025 amendment adds to a series of reforms aimed at streamlining cross-border capital flows without compromising on sectoral caps or national security concerns.
Official copy of the notification is as follows
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