India's NDI Rules Amendment: Unlocking Bonus Share Issuances for Foreign Investors in Restricted Sectors

The landscape of foreign investment in India continues to evolve, and the latest amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules), is a significant development that warrants attention. Notified on June 11, 2025, the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2025 have immediate implications for Indian companies with foreign shareholders, particularly those operating in sectors with FDI restrictions. 

This amendment directly addresses a long-standing point of ambiguity: the issuance of bonus shares by Indian companies to their non-resident shareholders, even when the company operates in a sector generally prohibited for foreign direct investment (FDI).

Whats the Core Change?

The new sub-rule (2) inserted after rule 7(1) of the NDI Rules clarifies that an Indian company, even if engaged in a sector or activity prohibited for FDI, can now issue bonus shares to its pre-existing shareholders who are persons resident outside India. For the benefit of the reader the amendment is reproduced below. 

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 of such shareholders is not changed pursuant to the issuance of bonus shares and any bonus shares issued to such shareholders prior to the date of commencement of this sub-rule shall be deemed to have been issued in accordance with the provisions of these rules or the 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, as the case may be. 

This leads to immediate question about what are restricted sectors under FDI policy, they are 

(a)Lottery business including Government or private lottery, online lotteries, etc.

(b) Gambling and betting including casinos, etc.

(c) Chit funds

(d) Nidhi company

(e) Trading in Transferable Development Rights

(f) Real estate business or construction of farm houses

(g) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

(h) Activities or sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations (other than permitted activities mentioned in paragraph (3) of Schedule I).

(i) Foreign technology collaborations in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for lottery business and gambling and betting activities. 

Key Takeaways for Businesses and Investors 

• Clarity for FDI-Prohibited Sectors: This is a crucial clarification for companies in sectors like atomic energy, lottery business, gambling and betting, where FDI is generally restricted. They can now proceed with bonus share issuances to their foreign shareholders. 

• Maintenance of Shareholding Pattern: A vital condition for this allowance is that the bonus share issuance must not change the existing shareholding pattern of the non-resident shareholders. This ensures that the proportionate foreign ownership remains consistent within these regulated sectors. 

• Retrospective Validation: A Welcome Relief: The amendment provides significant relief by stating that any bonus shares issued to non-resident shareholders before June 11, 2025, will be deemed to have been issued in accordance with the NDI Rules, 2019, or the earlier FEMA regulations of 2000 or 2017. This retrospective validation helps regularize past transactions and reduces potential compliance headaches.

Our Analysis

On a closer look at the circular, it is pertinent that the circular has a limited application to only few investors whose investment would be made as an FDI, before the restrictions have been installed by the Government of India in those particular sectors. 

In our opinion the following scenarios would fall under this circular. There might be a few who would advance the scenario of NRI investment into these sectors on non-repatriation basis. However, we submit that it is deemed to be on par with domestic investment and this circular clearly mentions about the investment made as FDI. 

• Change in Sector/Activity of the Indian Company: An Indian company might have started in a sector where FDI was permitted or unrestricted. Over time, due to business evolution, a strategic shift, or a change in government policy, that company might begin operating in a sector that subsequently becomes prohibited for FDI, or expands into an already prohibited area. The existing foreign shareholders, who invested when it was permissible, would still hold their shares.

• Grandfathering of Existing Investments: When a sector is declared "prohibited" for FDI, often existing foreign investments are "grandfathered" in. This means that while new FDI into that specific activity is barred, the existing foreign shareholders are not required to divest their holdings. They are allowed to continue holding their shares, but their ability to make further investments or receive certain benefits (like bonus shares) might have been unclear.

• Investment through Permitted Routes that Later Become Restricted: Historically, there might have been specific routes or structures through which foreign investment was allowed in certain areas that are now considered restricted. An investor might have come in through one of these routes, and their shares are still validly held.

If you have questions about how this impacts your business, feel free to reach out to PnP Consulting Private Limited at info@pnpconsutling.in