FEMA Rules Amended to Permit Bonus Shares in FDI-Prohibited Sectors

On June 11, 2025, the Ministry of Finance notified an amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”), allowing Indian companies engaged in FDI-prohibited sectors or activities to issue bonus shares to their pre-existing non-resident shareholders.

FDI inflow in India increased from USD 36.05 billion in 2013–14 to a record USD 84.84 billion in 2021–22 thanks to the government’s efforts to reform FDI policies; provisional data indicates that inflows increased by 26% in the first half of FY 2024–25 compared to the same period in FY 2023–24.

The Department for Promotion of Industry and Internal Trade (“DPIIT”) is responsible for formulating India’s FDI policy. It issues policy pronouncements through the Consolidated FDI Policy Circular, Press Notes, and Press Releases. These are notified as amendments to the NDI Rules by the Department of Economic Affairs, Ministry of Finance, under the Foreign Exchange Management Act, 1999 (“FEMA”).

Earlier this year, DPIIT issued a press note clarifying that Indian companies engaged in FDI-prohibited sectors may issue bonus shares to pre-existing non-resident shareholders, provided that the shareholding pattern of those shareholders does not change pursuant to the issuance.

FDI remains prohibited in lottery business, gambling and betting, chit funds, real estate business, tobacco manufacturing, and other sectors as outlined in Paragraph (2) of Schedule I of the NDI Rules and Paragraph 5.1 of the FDI Policy.

Key features of the new amendment are as follows:

• Effective date: The amendment came into force on June 11, 2025.
• Issuance of bonus shares: The amendment allows Indian companies engaged in FDI-prohibited sectors or activities to issue bonus shares to their pre-existing non-resident shareholders. This change has been introduced via Sub-rule (2) under Rule 7 of the NDI Rules.
• Condition: Issuance of bonus shares is permitted only if the shareholding pattern of such shareholders is not changed pursuant to the issuance.
• Retrospective application: The provision applies retrospectively, deeming bonus shares issued prior to the amendment to be issued in accordance with the NDI Rules, 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.