Open Access Research Article
White Black Legal – International Law Journal · ISSN 2581-8503
Evaluating Share Swaps in India under FEMA, NDI Rules, and the OI Framework
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Abstract
EVALUATING
SHARE SWAPS IN INDIA UNDER FEMA, NDI RULES, AND THE OI FRAMEWORK
AUTHORED
BY - KHUSHI DHINGRA, DEEKSHA RAMPAL & MAITRI BAGHEL
INSTITUTIONAL
AFFILIATION: National Law Institute University, Bhopal
Abstract
Share
swaps are increasingly important instruments for cross-border acquisitions,
group reorganisations, corporate migrations, and reverse-flipping transactions
involving Indian companies. Their apparent simplicity, exchanging one set of
equity instruments for another rather than paying cash, masks a layered
regulatory problem. A single transaction can simultaneously involve the issue
or transfer of Indian equity instruments to a non-resident and the acquisition
of foreign equity capital by an Indian resident. The former engages India’s
inbound foreign-investment framework, while the latter engages the
overseas-investment regime. This paper evaluates that interaction under the
Foreign Exchange Management Act, 1999 (FEMA), the Foreign Exchange Management
(Non-Debt Instruments) Rules, 2019 (NDI Rules), the Foreign Exchange Management
(Overseas Investment) Rules, 2022 (OI Rules), the corresponding RBI regulations
and directions, and adjacent company, securities, competition and tax law. It
argues that the 2024 insertion of Rule 9A into the NDI Rules materially
improves the legal architecture by expressly recognising swaps involving Indian
equity instruments and foreign equity capital, but does not create a single
integrated regulatory pathway. The principal difficulty therefore lies less in
the abstract legality of a swap than in the cumulative application of pricing,
valuation, sectoral, approval, reporting, control and financial-commitment
requirements to each leg. The paper develops a transaction-by-transaction
compliance model and proposes a more integrated framework for valuation,
approvals and reporting, while preserving safeguards against regulatory
arbitrage.
I. INTRODUCTION
Cross-border
corporate restructuring increasingly requires transactions that do not depend
upon contemporaneous cash consideration. Share swaps are particularly useful
because equity in one enterprise can be deployed as consideration for equity in
another, permitting acquisitions, reorganisations and changes in corporate
domicile without the immediate funding burden of a cash purchase. For Indian
businesses, however, the absence of a cash remittance does not remove
exchange-control consequences. FEMA regulates capital-account transactions
involving residents and non-residents, and the statutory framework operates
through delegated rules and regulations administered principally by the Central
Government and the Reserve Bank of India (RBI).[1]
The
legal significance of a share swap depends on what is exchanged, who exchanges
it, and what the exchange accomplishes. A purely domestic swap ordinarily
raises questions under company and securities law rather than exchange control.
A cross-border swap is different. If a non-resident acquires shares of an
Indian company, the transaction engages the inbound foreign-investment regime.
If an Indian resident acquires equity capital in a foreign entity, the outbound
leg engages the OI framework. The same economic bargain may therefore have two
legally distinct components. The 2024 insertion of Rule 9A into the NDI Rules
is important precisely because it recognises both swap of Indian equity
instruments and swap of foreign equity capital, while expressly cross-referencing
the OI Rules for the latter. [2]
This
distinction matters in contemporary corporate structures. “Flipping” may
involve an Indian operating company becoming a subsidiary of a foreign holding
company, while “reverse flipping” may involve the migration of the parent
structure back to India. In either direction, the transaction may use shares
rather than cash to realign ownership. Yet the exchange-control analysis cannot
be reduced to the commercial equality of the swap ratio. Each legally relevant
transfer must satisfy the conditions of the framework governing it.
The
central argument of this paper is therefore that Indian law presently adopts a
model of conditional permissibility rather than transactional neutrality.
Share swaps are not prohibited merely because they are swaps. But neither does
the absence of cash mean that regulatory requirements disappear. The NDI Rules,
OI Rules, RBI regulations and directions, and, where applicable, company,
securities, competition and tax laws operate cumulatively. The 2024 reform
closes an important textual gap, but it does not eliminate the structural
problem of dual compliance.
The
paper proceeds in six stages. First, it explains the mechanics and principal
classifications of share swaps. Second, it maps the FEMA architecture. Third,
it analyses inbound transactions under the NDI Rules. Fourth, it examines
outbound transactions under the OI framework. Fifth, it analyses hybrid swaps
involving parent or holding companies and identifies the consequences of
applying both regimes to the same commercial arrangement. Sixth, it evaluates
adjacent legal regimes and proposes reforms aimed at reducing uncertainty
without weakening regulatory safeguards.
II. SHARE SWAPS: CONCEPT, STRUCTURE AND CLASSIFICATION
A share swap may be understood
as an acquisition or transfer in which shares or other equity instruments are
used as consideration for acquiring equity instruments of another entity. The
essential economic feature is that the consideration is securities rather than
cash. In an Indian cross-border setting, the legally important question is not
simply whether consideration is non-cash, but whether the securities being
issued or transferred constitute an equity instrument covered by the applicable
FEMA framework.
Three classifications are
particularly useful.
First, inbound and outbound swaps. An inbound swap occurs where a
non-resident acquires Indian equity instruments, whether by subscription or
transfer, in circumstances covered by the NDI Rules. An outbound swap occurs
where a person resident in India acquires foreign equity capital in a manner
governed by the OI Rules. The 2024 amendment makes this distinction less
artificial by expressly recognising a swap of Indian equity instruments and a
swap of foreign equity capital within Rule 9A.[3]
Second, primary and secondary
swaps. In a primary swap, an Indian
company issues fresh equity instruments to the counterparty. This changes the
issuer’s capital structure and therefore invokes the company-law rules
governing further issue of securities. Section 62 of the Companies Act, 2013
regulates further issue of share capital, including issues for consideration
other than cash in specified circumstances.[4] A secondary swap, by contrast,
transfers already-issued securities between shareholders. It does not increase
the issuer’s capital but may trigger transfer, pricing and reporting
requirements under FEMA and, for listed companies, securities-law requirements.
Third, single-leg and hybrid swaps. A single-leg swap may be analysed
primarily under one regime. A hybrid swap has reciprocal effects: for example,
an Indian company may issue its shares to a foreign parent in exchange for
shares of a foreign subsidiary. The Indian company has issued Indian equity
instruments to a non-resident, while also acquiring foreign equity capital. The
two consequences are legally distinct even though commercially they form one
bargain. RBI’s overseas-investment directions expressly provide that, in a swap
of securities, both legs must comply with FEMA as applicable.[5]
This last category is the most
significant for regulatory analysis. It demonstrates why the phrase “share
swap” should not be treated as a self-contained legal category. It is a
transaction technique whose legal consequences depend on the residence of the
parties, the location and nature of the securities, the status of the investee
entity, the degree of control acquired, the sector involved, and whether the
securities are listed or unlisted.
III. THE FEMA ARCHITECTURE
FEMA distinguishes between current-account and
capital-account transactions and authorises the Central Government and RBI to
frame the rules and regulations through which capital-account transactions are
controlled. Section 6 is the principal statutory gateway for capital-account
transactions, while sections 46 and 47 provide rule-making and
regulation-making powers respectively.[6] This delegated structure explains why the operational
answer to a share-swap question is rarely found in FEMA alone.
For inbound investment, the principal instrument is
the NDI Rules, 2019. RBI’s Master Direction on Foreign Investment explains that
foreign investment is regulated under FEMA read with the NDI Rules and that RBI
administers the framework through directions issued to authorised persons.[7] The Mode of Payment and Reporting of Non-Debt
Instruments Regulations, 2019 supplement the substantive rules by prescribing
payment and reporting requirements, including FC-GPR and FC-TRS filings.[8]
For outbound investment, the OI Rules, OI Regulations
and OI Directions constitute a coordinated regime. The 2022 framework replaced
the earlier overseas-direct-investment architecture and sought to simplify the
rules, clarify definitions and reduce approval burdens.[9] The OI regime is deliberately layered: the Central
Government makes rules; RBI makes regulations; and RBI issues directions to
authorised dealers for operational implementation. The current Master Direction
on Overseas Investment confirms that the OI Rules, OI Regulations and RBI
directions are to be read together.[10]
1.
FEMA supplies the statutory authority and basic capital-account
framework.
2.
NDI
Rules and FEMA 395 regulations govern foreign investment into
India, including issue/transfer, pricing, payment and reporting.
3.
OI
Rules, OI Regulations and OI Directions govern investment by Indian residents outside India,
including ODI, OPI, financial commitment, valuation and reporting.
4.
Company
and securities law governs the corporate act of
issuing or transferring shares.
5.
Competition
and tax law may apply independently when
statutory thresholds or taxable transfers are implicated.
The practical implication is that compliance must be
sequenced rather than assumed. A transaction may be commercially agreed first
and legally analysed afterwards, but the transaction documents should not be
drafted on the assumption that one approval or filing cures the other leg.
IV. INBOUND SHARE SWAPS UNDER THE NDI FRAMEWORK
A. The 2024 Rule 9A reform
The most important recent development is Rule 9A of the NDI
Rules, inserted by the Fourth Amendment Rules, 2024. It provides that transfer
of Indian equity instruments between a resident and non-resident may be by way
of (i) swap of equity instruments, or (ii) swap of equity capital of a foreign
company in compliance with the OI Rules and applicable RBI regulations. It also
preserves the requirement of prior Government approval wherever Government
approval is applicable.[12]
The significance of Rule 9A should not be overstated.
It does not create a blanket exemption from the NDI Rules. Instead, it supplies
express legal recognition to a transaction technique that previously required
closer textual analysis. A swap must still comply with the other conditions
governing the underlying foreign investment: entry route, sectoral
restrictions, pricing, valuation, reporting and any applicable approval.
B. Sectoral restrictions and entry route
Foreign investment is not
regulated solely by the form of consideration. The NDI framework operates
through sectoral conditions and entry routes.[13] Where foreign investment in the
relevant sector is permitted under the automatic route, the transaction may
proceed without prior Government approval if the other conditions are
satisfied. Where the sector or transaction is subject to an approval requirement,
the fact that consideration is paid through a share swap does not remove that
requirement.[14]
Rule 9 of the NDI Rules also makes
clear that transfer of equity instruments involving residents and non-residents
remains subject to applicable pricing guidelines and Government approval where
required. The 2024 amendment modified the approval proviso while inserting Rule
9A, reinforcing the proposition that swap recognition is conditional rather
than absolute.[15]
C. Pricing and valuation
Valuation is central because a swap can obscure the economic
price of the acquisition if attention is paid only to the negotiated exchange
ratio. FEMA’s pricing architecture requires the issue or transfer of Indian
equity instruments to comply with prescribed pricing standards. RBI’s
foreign-investment directions distinguish between listed and unlisted companies
and prescribe different pricing methodologies and valuation requirements.[16]
For
unlisted Indian companies, the fair value of equity instruments must be
determined[17]
in accordance with internationally accepted pricing methodology on an
arm’s-length basis and certified by an appropriately qualified professional as
prescribed by the framework. For listed companies, market-based pricing rules
and SEBI regulations may additionally apply. The correct analytical approach is
therefore to value the Indian security independently and then test whether the
resulting transaction satisfies the FEMA pricing floor or ceiling applicable to
the particular direction of transfer.[18]
This
has an important consequence for swap negotiations. A contractual exchange
ratio is not itself a regulatory valuation. If an Indian company issues ₹100 of
equity in exchange for foreign securities valued at ₹80, the parties cannot
necessarily cure the difference by describing the arrangement as a “strategic
premium.” The relevant FEMA and company-law requirements must still be
satisfied. Conversely, a transaction may be commercially equal in value but
require separate valuation certificates because each jurisdiction uses
different valuation conventions.
D. Reporting and mode of payment
A swap does not necessarily
eliminate reporting merely because there is no cash remittance. The FEMA 395
Regulations prescribe reporting requirements for investment into India,
including FC-GPR for issue of equity instruments to non-residents and FC-TRS for
specified transfers.[19] RBI’s reporting architecture
therefore treats regulatory information as distinct from monetary movement.
That distinction is important in share swaps: the absence of a bank transfer
cannot be equated with the absence of a reportable foreign-investment event.
V. OUTBOUND SHARE SWAPS UNDER THE OI FRAMEWORK
A. ODI, OPI and the control question
The OI framework replaced the
older JV/WOS terminology[20] with a broader framework built
around ODI and OPI. ODI includes acquisition of unlisted equity capital,
investment in 10% or more of the paid-up equity capital of a listed foreign
entity, and investment with control where the holding is below 10%. Once an
investment is classified as ODI, it retains that character notwithstanding
later changes in percentage or control.[21]
This is important for share swaps
because the proposition that “non-controlling equals OPI” is too simplistic. A
listed foreign investment below 10% may still be ODI if control is acquired.
Conversely, a holding that is not ODI may fall within OPI subject to the
specific OI rules. The analysis therefore requires the transaction documents,
voting rights, governance arrangements and the status of the foreign entity to
be examined together.
The OI framework defines control
functionally[22], including rights to appoint a
majority of directors or to control management or policy decisions directly or
indirectly. The definition recognises shareholder, management and voting
agreements as potential sources of control.[23] Consequently, a transaction
structured below a numerical threshold may still be ODI if the governance
package confers control.
B. Swap as a permitted mode of overseas investment
The OI Regulations expressly
recognise swap of securities as a mode of payment for overseas investment.[24] The OI Rules also recognise
swap of securities among the permitted modes through which overseas investment
may be made. The legal effect is significant: the absence of an outward cash
remittance does not prevent the transaction from being an overseas investment,
but the swap itself is a recognised route through which the investment may be
implemented.
The OI Directions add an important
operational rule: in a swap of securities, both legs must comply with FEMA as
applicable. Where a swap results in an acquisition that does not conform to the
OI framework, for example, because of restrictions applicable to the foreign
entity or the relevant financial-services activity, the directions contemplate
corrective consequences, including disinvestment within the prescribed period
in specified cases.[25]
C. Financial commitment and valuation
The OI regime also regulates
financial commitment[26] by an Indian entity. Financial
commitment aggregates ODI, specified debt and non-fund-based facilities,
subject to the framework’s limits and conditions.[27] For a pure equity swap, the
principal analytical question is whether the foreign equity acquired
constitutes ODI and what value must be attributed to that investment for
purposes of the applicable financial-commitment architecture.
Valuation is therefore not merely
an accounting exercise. It affects the regulatory character and capacity of the
Indian investor. The OI Regulations also require evidence of investment and
provide for designated authorised-dealer-bank routing and reporting. An Indian
company cannot assume that because it has “paid” with shares, there is no
financial-commitment or reporting event.
D. Restricted activities and
financial services
The OI Rules contain
restrictions concerning the activities and structures in which overseas
investment may be made. Financial-services activities receive particular
treatment, reflecting prudential concerns and the possibility that an Indian
company could use an offshore structure to assume regulated financial exposure
indirectly.[28] Accordingly, a swap involving a
foreign holding company, investment vehicle or financial-services entity
requires a substantive examination of the foreign entity’s business, not merely
its corporate label.
VI. HYBRID SWAPS: WHEN INBOUND AND OUTBOUND REGIMES COLLIDE
The most difficult transaction
is one in which the Indian entity issues its own shares to a foreign parent in
exchange for shares of a foreign subsidiary. Economically, the Indian company
has acquired a foreign asset without cash. Legally, however, two events have
occurred: Indian equity has moved to a non-resident, and foreign equity has
moved to an Indian resident.
Rule 9A is significant because it
expressly contemplates this architecture. But the rule should be read as a
coordination provision rather than a netting rule. The NDI side must satisfy
inbound investment requirements, while the foreign acquisition must satisfy the
OI framework. The legal systems do not generally permit the parties to say that
the value of the foreign shares “pays for” the Indian shares and therefore only
one regulatory leg exists.[29]
This produces four recurring
friction points.
A. Two valuations
The Indian shares must satisfy the applicable inbound
pricing rules. The foreign shares must be valued in accordance with the OI
framework and applicable RBI directions. A single commercial valuation report
may be useful, but it cannot be assumed to satisfy every legally prescribed
certification requirement. Where the two valuations diverge, the parties may
have to adjust the exchange ratio, introduce a balancing mechanism, or
restructure the transaction.
B. Two approval analyses
The inbound leg may be automatic while the outbound leg
requires approval, or vice versa. Sectoral restrictions, Government approval
requirements and the status of the foreign entity must therefore be tested
independently. Rule 9A’s cross-reference to the OI Rules reinforces this
conclusion.[30]
C.
Two reporting chains
An Indian share issuance to a non-resident can require
FC-GPR reporting, while acquisition of foreign equity may require Form FC and
other OI reporting through the designated AD bank. The reporting systems are
not interchangeable.[31] Transaction documents should therefore contain a detailed
closing checklist identifying responsibility for each filing, evidence of
valuation and any conditions precedent.
D. Control and indirect structures
The most difficult
classification issues arise where the Indian company acquires an interest in a
foreign holding company that itself owns subsidiaries. The OI analysis must ask
whether the Indian investor acquires ODI, OPI, or an investment that triggers
further consequences because of control. The existence of shareholder
agreements, veto rights or board appointment rights may be as important as the
percentage of shares acquired.[32]
VII.
INTERACTION WITH COMPANY, SECURITIES, COMPETITION AND TAX LAW
FEMA compliance does not replace
corporate-law compliance. Where an Indian company issues new shares as
consideration, section 62 of the Companies Act becomes relevant. Private
placement and preferential issue requirements may also apply depending on the
structure. For listed companies, SEBI’s ICDR Regulations regulate preferential
issues, including valuation where securities are issued for consideration other
than cash.[33]
A listed-company swap can also
implicate takeover regulation.[34] Regulation 3 of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 generally
requires an open offer when an acquirer crosses the prescribed 25% voting-right
threshold, subject to the regulation’s exceptions and conditions.[35] A swap is therefore not a method
for bypassing takeover law merely because consideration is in securities rather
than cash.
Competition law is similarly
transaction-neutral. Section 5 of the Competition Act, 2002 defines
combinations to include acquisitions of shares, voting rights, assets or
control above prescribed thresholds, while section 6 regulates combinations
that cause or are likely to cause an appreciable adverse effect on competition.[36] The CCI’s framework also contains
exemptions for specified acquisitions, including certain intra-group
transactions and acquisitions that do not amount to a change of control. The
relevant question is consequently whether the share swap constitutes an acquisition
or change in control falling within the statutory regime, not whether it is
labelled a reorganisation.[37]
Tax law adds a separate layer.[38] A share swap can constitute a
transfer of a capital asset and can therefore raise capital-gains questions
unless a specific exemption applies. Section 47 of the Income-tax Act, 1961
excludes specified transfers from the operation of section 45, including
particular amalgamation and demerger transactions, but it does not create a
general exemption for every share-for-share exchange.[39]
Cross-border restructurings also
require attention to section 9 of the Income-tax Act, including the statutory
rules concerning indirect transfers where shares of a foreign company derive
substantial value from Indian assets. The tax analysis is conceptually separate
from FEMA: a transaction may be permissible under exchange-control law but
still create a tax liability.[40]
VIII. REVERSE FLIPPING AND CORPORATE MOBILITY
Share swaps have acquired
particular importance in “reverse flipping,” where a company that had earlier
established an offshore parent structure seeks to return its principal holding
structure to India. The commercial motivation may include access to Indian
capital markets, investor familiarity, reduced structural complexity and
alignment between the place of operations and the place of incorporation. The
transaction may involve exchanging shares in an offshore parent for shares in
an Indian company, sometimes alongside a merger or scheme of arrangement.
The Companies Act provides a
statutory route for cross-border mergers.[41] Section 234 permits mergers or
amalgamations between Indian companies and companies incorporated in notified
foreign jurisdictions, subject to the statutory framework and RBI approval
requirements prescribed under the law.[42] This is distinct from a bilateral
share swap, but the two techniques can produce similar economic outcomes. The
choice between them should therefore be made after comparing corporate-law
requirements, FEMA consequences, tax treatment and shareholder effects rather
than on the basis of transaction speed alone.
The regulatory treatment of reverse
flipping illustrates a broader principle: corporate mobility is possible, but
it is not legally neutral. A change in the location of the parent company can
alter foreign-investment status, ownership percentages, tax exposure and
reporting obligations. The most efficient structure is consequently not
necessarily the structure involving the fewest cash transfers; it is the
structure that produces the most predictable compliance profile.
IX. CRITICAL EVALUATION OF THE PRESENT FRAMEWORK
The 2024 Rule 9A reform should
be regarded as a meaningful liberalisation, but not as the completion of the
legal architecture. Four gaps remain.
First, there is no single
integrated compliance pathway for hybrid swaps. The transaction may be
commercially indivisible but legally divided between inbound and outbound
regimes. The resulting duplication is manageable for large transactions but
disproportionately burdens smaller restructurings, particularly where the
transaction is economically straightforward but documentation-heavy.
Second, valuation remains
fragmented. The inbound and outbound regimes
each contain valuation requirements, while listed securities may additionally
be subject to SEBI pricing rules. This can generate multiple professional
certificates for a single exchange. A coordinated recognition mechanism,
without relaxing substantive valuation standards, would reduce friction.
Third, control-based classification
can create uncertainty. The OI framework’s functional
approach to control is commercially sensible because formal shareholding
percentages do not always capture governance power. But the absence of a
bright-line safe harbour for ordinary minority protections can make transaction
design conservative. The answer should not be to abandon the control test;
rather, RBI could provide more examples distinguishing ordinary
investor-protection rights from rights that amount to control.
Fourth, reporting remains
fragmented. FC-GPR/FC-TRS reporting and OI
reporting serve different regulatory purposes, but a hybrid swap should ideally
be capable of being reported through a coordinated digital workflow that
identifies both legs and prevents inconsistent information. The present system
places significant responsibility on the authorised dealer and transaction
advisers to reconcile the two regimes.
The anti-round-tripping concern
should also be treated carefully. The current framework contains structural
restrictions and approval mechanisms, and RBI directions require both legs of a
swap to comply with FEMA. But “round tripping” should not be described as an
independent statutory offence or prohibition without identifying the specific
provision engaged. The better analytical formulation is that certain structures
may attract heightened scrutiny because they can implicate prohibited
structures, sectoral restrictions, indirect ownership concerns or
regulatory-arbitrage risks.[43]
X. A PROPOSED COMPLIANCE MODEL FOR SHARE SWAPS
A more predictable framework can
be developed without legislative overhaul. Parties should adopt a five-stage
analysis.
Stage 1: Map residence and
securities. Identify every transferor,
transferee, issuer and ultimate beneficial owner, and specify whether each
security is Indian equity, foreign equity, listed, unlisted, primary or
secondary.
Stage 2: Split the transaction into
legal legs. Do not begin with the commercial
label “share swap.” Identify each issue and transfer and assign it to the NDI
or OI framework as applicable.
Stage 3: Test substantive
permissibility. For the inbound leg, examine
sectoral cap, entry route, pricing and approval. For the outbound leg, examine
ODI/OPI classification, control, eligible foreign activity, financial-services
restrictions, financial commitment and approval requirements.[44]
Stage 4: Run parallel valuation and
reporting checks. Obtain the valuation required
under each regime and identify every filing, including FC-GPR/FC-TRS and OI
reporting. The closing conditions should expressly allocate responsibility for
each filing.[45]
Stage 5: Conduct non-FEMA review. Test Companies Act requirements,
SEBI regulations for listed entities, takeover consequences, competition-law
thresholds, tax consequences and any sector-specific approvals. A transaction
should be considered “FEMA-cleared” only after this broader interaction has
been mapped.
This model has a further advantage:
it makes legal advice auditable. Rather than a single conclusion that “the swap
is permissible,” counsel can provide a leg-by-leg matrix identifying the rule,
compliance requirement, responsible party, evidence and closing consequence.
XI. RECOMMENDATIONS
Three reforms would materially improve certainty.
First,
RBI should publish a dedicated consolidated guidance note for hybrid swaps
under Rule 9A, containing worked examples of common parent-subsidiary
structures. The existing framework already contains the substantive authority;
what is missing is a single interpretive map.
Second,
the regulators should develop coordinated valuation guidance. Where the same
two securities are exchanged, a valuation report satisfying specified
professional and methodological criteria could be recognised for both FEMA
legs, subject to regulator-specific adjustments where necessary.
Third,
reporting should be integrated. A single transaction identifier could link the
inbound and outbound filings, allowing the AD bank and regulators to see that
the two reports concern the same swap. This would reduce duplicate
documentation and make discrepancies easier to identify before closing.
These
reforms would not require a shift toward unrestricted capital mobility. On the
contrary, they would make the existing policy more effective by distinguishing
genuine regulatory risks from procedural duplication.
XII. CONCLUSION
Indian
law has moved from relative textual uncertainty toward express recognition of
share swaps. Rule 9A is the clearest evidence of that shift. Yet the legal
position remains one of conditional permissibility. A share swap involving an
Indian company and a non-resident is not regulated by one rule simply because
the consideration is securities. The transaction must be decomposed into its
legal effects and tested under the applicable inbound and outbound regimes.
The
NDI framework governs the Indian leg where foreign investment is received or
Indian equity instruments are transferred to a non-resident; the OI framework
governs the foreign-investment leg undertaken by an Indian resident. RBI’s
directions expressly require both legs of a securities swap to comply with
FEMA. Company law, SEBI law, competition law and tax law may then add
independent requirements. The resulting framework is therefore best understood
as a cumulative compliance architecture.
The
central regulatory challenge is not whether India permits share swaps. It does.
The challenge is whether the law provides a sufficiently predictable route for
transactions that produce simultaneous inbound and outbound consequences. Rule
9A has answered the first question more clearly; the next reform should answer
the second. Integrated guidance, coordinated valuation and linked reporting
would reduce execution risk while preserving India’s ability to screen
transactions on sectoral, prudential and anti-arbitrage grounds.
As
cross-border corporate structures continue to evolve, especially through
reverse flipping and global group reorganisations, the quality of India’s
exchange-control regime will increasingly be measured not by the number of
transactions it permits, but by the predictability with which lawful
transactions can be completed. Share swaps provide a useful test case: they are
economically efficient, legally possible, and commercially important, but their
full potential depends upon regulatory coherence across the two sides of the
transaction.
[1] Foreign Exchange
Management Act, No. 42 of 1999, §§ 6, 46-47 (India).
[2] Foreign Exchange
Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024, Gazette of
India, S.O. 3492(E), r. 4 (Aug. 16, 2024).
[3] Id. r. 4
(inserting r. 9A into the Foreign Exchange Management (Non-Debt Instruments)
Rules, 2019).
[4] Companies Act,
No. 18 of 2013, § 62(1)(c) (India).
[5] Foreign Exchange
Management (Overseas Investment) Directions, 2022, para. 3 (Aug. 22,
2022).
[6] Foreign Exchange
Management Act, No. 42 of 1999, §§ 6, 46-47 (India).
[7] Reserve Bank of
India, Master Direction, Foreign Investment in India, RBI/FED/2017-18/60, FED
Master Direction No. 11/2017-18 (updated Jan. 20, 2025).
[8] Foreign Exchange
Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations,
2019, No. FEMA 395/2019-RB (Oct. 17, 2019), regs. 3-4.
[9] Foreign Exchange
Management (Overseas Investment) Rules, 2022, G.S.R. 646(E) (Aug. 22,
2022); Foreign Exchange Management (Overseas Investment) Regulations, 2022,
No. FEMA 400/2022-RB (Aug. 22, 2022).
[10] Reserve Bank of
India, Master Direction, Overseas Investment, RBI/FED/2024-25/121, FED Master
Direction No. 15/2024-25 (July 24, 2024; updated Apr. 1, 2026).
[11] Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019, r. 2A (India); Reserve Bank of
India, Master Direction, Foreign Investment in India, supra note 7.
[12] Foreign Exchange
Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024, S.O. 3492(E),
r. 4 (Aug. 16, 2024).
[13] Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019, sch. I (India).
[14] Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019, sch. I (India).
[15] Id. r. 9(1) (as
amended Aug. 16, 2024).
[16] Reserve Bank of
India, Master Direction, Foreign Investment in India, supra note 7, paras.
2.3-2.5.
[17] Reserve Bank of
India, Master Direction, Foreign Investment in India, supra note 7, para. 2.3.
[18] Reserve Bank of
India, Master Direction, Foreign Investment in India, supra note 7, paras.
2.3-2.5.
[19] Foreign Exchange
Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations,
2019, No. FEMA 395/2019-RB, reg. 4 (Oct. 17, 2019).
[20] Foreign Exchange
Management (Overseas Investment) Rules, 2022, r. 2(1) (India); Reserve Bank of
India, Master Direction, Overseas Investment, supra note 10, pt. I.
[21] Foreign Exchange
Management (Overseas Investment) Rules, 2022, r. 2(1)(e)-(f) (India); Reserve
Bank of India, Master Direction, Overseas Investment, supra note 10,
pt. I.
[22] Foreign Exchange
Management (Overseas Investment) Rules, 2022, r. 2(1)(d) (India).
[23] Foreign Exchange
Management (Overseas Investment) Rules, 2022, r. 2(1)(d) (India); Reserve Bank
of India, Master Direction, Overseas Investment, supra note 10, pt. I.
[24] Foreign Exchange
Management (Overseas Investment) Regulations, 2022, No. FEMA 400/2022-RB,
reg. 8(3) (Aug. 22, 2022).
[25] Reserve Bank of
India, Foreign Exchange Management (Overseas Investment) Directions, 2022,
para. 3, Annex I (Aug. 22, 2022).
[26] Foreign Exchange
Management (Overseas Investment) Regulations, 2022, No. FEMA 400/2022-RB,
regs. 3-6 (Aug. 22, 2022).
[27] Foreign Exchange
Management (Overseas Investment) Regulations, 2022, No. FEMA 400/2022-RB,
reg. 3 (Aug. 22, 2022); Foreign Exchange Management (Overseas Investment)
Rules, 2022, sch. I (India).
[28] Foreign Exchange
Management (Overseas Investment) Rules, 2022, sch. I, para. 2 (India); Reserve
Bank of India, Master Direction, Overseas Investment, supra note 10, para.
20(7).
[29] Foreign Exchange
Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024, S.O. 3492(E),
r. 4; Reserve Bank of India, Foreign Exchange Management (Overseas Investment)
Directions, 2022, para. 3.
[30] Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019, r. 9A (India); Foreign Exchange
Management (Overseas Investment) Rules, 2022, r. 9 (India).
[31] Foreign Exchange
Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations,
2019, reg. 4; Foreign Exchange Management (Overseas Investment) Regulations,
2022, reg. 10.
[32] Foreign Exchange
Management (Overseas Investment) Rules, 2022, r. 2(1)(d), (e) (India).
[33] Companies Act,
No. 18 of 2013, §§ 42, 62 (India); Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2018, regs. 160-164
(as amended).
[34] Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011, reg. 3(1)-(2) (as amended).
[35] Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011, reg. 3 (as amended).
[36] Competition Act,
No. 12 of 2002, §§ 5-6 (India).
[37] Competition
Commission of India, Regulation of Combination, Competition Act, 2002, §§ 5-6,
https://www.cci.gov.in/regulation-of-combination (last visited Oct. 7,
2026).
[38] Income-tax Act,
No. 43 of 1961, §§ 2(47), 45, 47 (India).
[39] Income-tax Act,
No. 43 of 1961, §§ 45, 47 (India).
[40] Id. § 9(1)(i),
Explanation 5.
[41] Companies Act,
No. 18 of 2013, § 234(1)-(2) (India).
[42] Companies Act,
No. 18 of 2013, § 234 (India); Companies (Compromises, Arrangements and
Amalgamations) Rules, 2016, r. 25A (India).
[43] Foreign Exchange
Management (Overseas Investment) Rules, 2022, rr. 8-9, 19 (India); Reserve Bank
of India, Foreign Exchange Management (Overseas Investment) Directions, 2022,
paras. 3, 20.
[44] Foreign Exchange
Management (Overseas Investment) Rules, 2022, rr. 9, 19 & sch. I, para. 3;
Reserve Bank of India, Master Direction, Overseas Investment, supra note 10.
[45] Foreign Exchange
Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations,
2019, reg. 4; Foreign Exchange Management (Overseas Investment) Regulations,
2022, regs. 9-10.
How to Cite This Article
KHUSHI DHINGRA, DEEKSHA RAMPAL, MAITRI BAGHEL, Evaluating Share Swaps in India under FEMA, NDI Rules, and the OI Framework., White Black Legal – International Law Journal, ISSN: 2581-8503, Vol. Volume 4, Issue VOLUME 4 ISSUE 2, October 2026, pp. 395-412. Available at: https://www.whiteblacklegal.co.in/details/evaluating-share-swaps-in-india-under-fema-ndi-rules-and-the-oi-framework
Author & Publication Record
Authors: KHUSHI DHINGRA, DEEKSHA RAMPAL & MAITRI BAGHEL
Registration ID: 107148 | Published Paper ID: WBL7148, WBL7149 & WBL7150
Year: Oct- 2026 | Volume: 4 | Issue: 2
Approved ISSN: 2581-8503 | Country: Delhi, India
Page No.: 395-412
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