Key Amendment to FEMA (Non-Debt
Instruments) Rules, 2019: Bonus Shares Now Permitted for Non-Resident
Shareholders in Prohibited Sectors
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In a noteworthy move aimed at
refining India’s foreign investment regulatory framework, the Ministry of
Finance, through a notification dated 11 June 2025, has introduced a
significant amendment to the Foreign Exchange Management (Non-Debt
Instruments) Rules, 2019. The change allows Indian companies operating in FDI-prohibited
sectors to issue bonus shares to their existing non-resident
shareholders, marking a pivotal clarification in India's FEMA regulatory
landscape.
Background
India maintains strict controls
over foreign investments in certain sensitive sectors—namely lottery, chit
funds, real estate business (excluding development), and gambling or betting—where
FDI is completely prohibited. Under the previous interpretation of FEMA
regulations, even corporate actions such as issuing bonus shares were viewed as
indirect routes of foreign investment and were therefore restricted in these
sectors.
What the Amendment Says
The new amendment provides that:
Indian companies operating in
FDI-prohibited sectors may now issue bonus shares to their existing
non-resident shareholders,
provided that:
- The
issuance does not result in any change in the shareholding pattern.
- The
bonus shares are allotted from free reserves or securities premium, as per
the Companies Act, 2013.
The move primarily affects
companies that had foreign shareholders prior to the sector being notified as
FDI-prohibited or that had received FDI before updated restrictions took
effect. These companies can now carry out bonus issuances—a standard business
action—without fear of violating FEMA regulations.
The key caveat is that the
issuance must be proportionate, thereby preserving the pre-existing
foreign shareholding ratio. This ensures that the amendment does not
serve as a backdoor route for indirect foreign investment, aligning the
change with the policy intent of maintaining sectoral restrictions.
Retrospective Validation
Any bonus shares issued before the
date of this notification (11 June 2025) shall be deemed to have been issued in
compliance with FEMA rules,
even if such issuance was previously considered a grey area.
This provides welcome relief to
companies and foreign investors who had previously undertaken such actions in
good faith but faced potential regulatory scrutiny.
The 11 June 2025 amendment to the FEMA
(Non-Debt Instruments) Rules, 2019 represents a pragmatic evolution in
India’s foreign investment regime. By allowing the issuance of bonus shares
to non-resident shareholders in FDI-prohibited sectors—with clear
safeguards to maintain the shareholding pattern—the government has introduced a
measured balance between policy protection and investor facilitation.
This move reaffirms India's
commitment to fostering a stable, transparent, and investor-friendly
regulatory environment, even in sectors with tight foreign investment
controls.