In 2025, various legal developments have taken place which may impact on the way M&A deals are being done. This article summarises such developments and potential impact of these changes on domestic and cross-border transactions.
Bonus Shares in FDI-Prohibited Sectors
On 11 June 2025, the Ministry of Finance through Notification S.O. 2549(E) (2025 Notification) amended Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) permitting Indian companies operating in FDI-prohibited sectors to issue bonus shares to existing non-resident shareholders, provided the shareholding pattern of such non-resident shareholders does not change pursuant to the bonus issue.
For background, FDI is currently permitted in majority sectors under the automatic route, and a few sectors still require prior Government approval (including for investing beyond the prescribed shareholding threshold). However, FDI is prohibited in certain sectors namely lottery, gambling, chit funds, real estate (excluding construction development), tobacco manufacturing and in sectors exclusively reserved for public sector – namely atomic energy and railway operations.
Pursuant to 2025 Notification, bonus issues are permitted in the FDI-prohibited sectors, as long as, there is no change in the shareholding pattern of such non-resident shareholders pursuant to the bonus issue. Further, bonus shares issued prior to 2025 Notification under similar conditions are considered valid. This move provides clarity for Indian companies in sectors restricted by FDI. Further, it allows these companies to take corporate actions without unintentionally violating the NDI Rules.
Compounding Directions – clarification regarding non-serious breaches
In April 2025, the Reserve Bank of India (RBI) amended the FEMA Compounding Directions through RBI Master Directions – RBI/FED/2025-26/135 FED Master Direction No.04/2025-26 dated 22 April 2025 (2025 Master Direction). 2025 Master Direction includes a cap on the compounding amount for certain non-serious violations. The cap applies to contraventions listed under Row 5 of the computation matrix, which include reporting delays and procedural lapses and are are now capped at INR 2,00,000 for each instance. It is worthwhile to note that the cap’s applicability depends on factors such as the nature of violation, special circumstances, specific details of each case, and the public interest. The amendment provides flexibility to the compounding authority to not disproportionately penalise the violations which are not serious in nature and allows the organisations to regularise such lapses through compounding proceedings.
Another important change introduced in 2025 Master Direction is removal of 50% penalty for repeat violations. New applications for the repeat violation will be reviewed independently and on the basis of facts of each case.
Finally, 2025 Master Direction makes a distinction between the “compounding amount” and the “penalty amount.” The compounding amount is the lower amount that the RBI imposes after an application, whereas the penalty amount is the highest fine that can be imposed under Section 13 of the FEMA.
Additional documentation requirement – Transfer of shares of private companies
On 3 June 2025, NSDL, through Circular, NSDL/POLICY/2025/0071 dated 3 June 2025 announced that the demat account holders are required to submit a company-issued consent letter before transferring dematerialised shares of private companies (NSDL Circular). For background, the process of transfer of dematerialised shares involves the seller executing and issuing the depository instructions slips (DIS) to its Depository Participant (DP) to transfer the shares to the demat account of the buyer. The new process additionally requires a consent letter in a prescribed format from the investee private limited company before transferring the shares to the buyer’s demat account.
While this aims to improve transparency and compliance, the circular may create challenge for sellers from practical implementation. The sellers, usually expect to receive the sale consideration in parallel while handing over the DIS to the DP. Moreover, the board approvals of the investee private limited companies are typically obtained once the shares and consideration is received by the respective parties. Therefore, from practical standpoint, NSDL Circular may pose practical challenges, and we hope to see further clarification from NSDL in this regard.