Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2020

Last updated: 09 December 2020

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The Ministry of Finance has issued the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2020. These amendments clarify that multilateral banks, where India is a member, will not be treated as entities of a specific country, nor will any country be considered the beneficial owner of their investments in India. Additionally, the rules update the sectoral cap and entry routes for Foreign Direct Investment (FDI) in the Defence sector, allowing up to 100% automatic investment under certain conditions and specifying requirements for industrial licensing and security clearances.

MINISTRY OF FINANCE
(Department of Economic Affairs)
NOTIFICATION
New Delhi, the 8th December, 2020

S.O. 4441 (E). - In exercise of the powers conferred by clauses (aa) and (ab) of sub-section (2) of section 46 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Central Government hereby makes the following rules further to amend the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, namely:-

1. Short title and commencement. – (1) These rules may be called the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2020.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, in rule 6, in clause (a), after the third proviso, the following proviso shall be inserted, namely:-

Provided also that a Multilateral Bank or Fund, of which India is a member, shall not be treated as an entity of a particular country nor shall any country be treated as the beneficial owner of the investments of such Bank or Fund in India.

3. In the principal rules, in Schedule 1, in the Table,-

(i) for serial number 6 and the entries relating thereto, the following serial number and entries shall be substituted, namely:-

S. No.	Sector/Activity	Sectoral Cap	Entry Route
(1)	(2)	(3)	(4)
“6	Defence
6.1	Defence Industry subject to Industrial license under the Industries (Development and Regulation) Act, 1951 and Manufacturing of small arms and ammunition under the Arms Act, 1959	100%	Automatic up to 74% Government route beyond 74% wherever it is likely to result in access to modern technology or for other reasons to be recorded
6.2	Other Conditions
	a) FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses. b) Infusion of fresh foreign investment up to 49%, in a company not seeking industrial license or which already has Government approval for FDI in Defence, shall submit a declaration with the Ministry of Defence in cases of change in equity/shareholding pattern or transfer of stake by existing investor to new foreign investor, for FDI up to 49%, within a period of thirty days of such change and any proposal for raising FDI beyond 49% from such companies shall require Government approval. c) License applications will be considered by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, in consultation with Ministry of Defence and Ministry of External Affairs. d) Foreign investment in the sector shall be subject to security clearance by the Ministry of Home Affairs and as per guidelines of the Ministry of Defence. e) Investee company shall be structured to be self-sufficient in the areas of product design and development and the investee or joint venture company along with the manufacturing facility, shall also have maintenance and life cycle support facility of the product being manufactured in India. f) Foreign investments in the Defence sector shall be subject to scrutiny on grounds of national security and Government reserves the right to review any foreign investment in the Defence sector that affects or may affect national security.”

[F. No. 01/05/EM/2019]

ANAND MOHAN BAJAJ,Addl. Secy.

Note: The principal rules were published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number S.O.3732 (E), dated the 17^th October, 2019 and subsequently amended vide numbers S.O. 4355 (E), dated the 5^th December 2019, S.O. 1278 (E), dated the 22^nd April, 2020 and S.O. 1374 (E), dated the 27^th April, 2020 and S.O. 2442 (E), dated the 27^th July, 2020.

FAQ :

These rules amend the existing Foreign Exchange Management (Non-debt Instruments) Rules, 2019, primarily to clarify investment provisions for multilateral banks and update regulations for the Defence sector.

The amendments state that a Multilateral Bank or Fund, of which India is a member, will not be considered an entity of a particular country, and no country will be deemed the beneficial owner of its investments in India.

FDI in the Defence sector is now permitted up to 100% under the automatic route for companies requiring an industrial license, up to 74% automatically, and beyond 74% through the government route if it provides access to modern technology or for other specified reasons.

Yes, for companies not seeking an industrial license or already having government approval for FDI in Defence, a declaration must be submitted to the Ministry of Defence within thirty days of any change in equity/shareholding pattern or stake transfer to a new foreign investor for FDI up to 49%.

Foreign investments are subject to security clearance by the Ministry of Home Affairs, adherence to Ministry of Defence guidelines, and the investee company must be structured to be self-sufficient in product design, development, maintenance, and life cycle support in India. The government also reserves the right to review investments on national security grounds.