Amendment to NDI Rules Eases Restrictions on Companies Issuing Bonus Shares

The Ministry of Finance has introduced amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, allowing resident companies to issue bonus shares to existing non-resident shareholders without increasing their shareholding percentage. This move eases the restrictions on companies operating in sectors prohibited for Foreign Direct Investment (FDI) or undertaking activities prohibited from receiving FDI. The amendment also provides retrospective validation to bonus shares already issued, offering relief to several companies with non-compliance issues.

Key Takeaways:

• The Amendment Notification, effective from June 11, 2025, allows resident companies to issue bonus shares to existing non-resident shareholders without increasing their shareholding percentage.
• The amendment applies retrospectively, covering bonus issuance undertaken during the subsistence of the erstwhile Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 or the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.
• Prohibited sectors for FDI include lottery business, gambling and betting, chit funds, and real estate business.
• The Amendment Notification provides clarity on the deeming language, highlighting the relaxations are available retrospectively, including relating to actions undertaken under the erstwhile regulations.
• The move is beneficial to foreign shareholders with investments 'grandfathered' under previous laws, allowing them to receive bonus shares without increasing their total shareholding percentage.
• The amendment reduces legal complexity and uncertainty for existing foreign investors in companies operating in FDI-prohibited sectors.

Statistics:

• The Ministry of Finance introduced the Amendment Notification on June 11, 2025.
• The amendment applies retrospectively, covering a period from the erstwhile Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 or the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.
• The prohibited sectors for FDI include lottery business, gambling and betting, chit funds, and real estate business.

Sources:

• "Amendment to NDI Rules On June 11, 2025, the Ministry of Finance ("MoF") has introduced amendments to Rule 7 of the NDI Rules ("Amendment Notification"). The Amendment Notification allows resident companies (operating in sectors prohibited for Foreign Direct Investment ("FDI") or undertaking activities prohibited from receiving FDI as elaborated below) to issue bonus shares to existing non-resident shareholders with the condition that such non-resident shareholders' shareholding does not increase pursuant to such issuance. The Amendment Notification came into effect from June 11, 2025. The Amendment Notification is also retrospective in nature and applies to bonus issuance undertaken during the subsistence of the erstwhile Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 or the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017."
• "The FDI Policy, 2020 restricts Foreign Direct Investment in the following sectors: lottery business including government/private lottery, online lotteries, etc.; gambling and betting including casinos etc.; chit funds; nidhi company; trading in transferable development rights; real estate business or construction of farm houses1; manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes; and activities/sectors not open to private sector investment e.g. (a) atomic energy; and (b) railway operations (other than permitted activities mentioned in para 5.2 of the FDI Policy, 2020)."