Rule 19 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 19 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 deals with a scheme of compromise, arrangement, merger, amalgamation, demerger or transfer of undertaking between Indian companies when some shareholders of the transferor company are resident outside India. It lets the transferee or new company issue equity instruments to those shareholders on conditions about entry route, caps and prohibited sectors, and sends listed-company schemes to the SEBI listing regulations.
This article is based on the Rules as notified on 17 October 2019 (S.O. 3732(E)) as amended by the notifications named in this article; the latest amendment consulted is S.O. 4870(E) dated 2 September 2026. Amendments made after that date should be checked in the Gazette. There is no official consolidated text. Rule 19(1) was substituted, and sub-rule (2) amended, by S.O. 1802(E) of 12 April 2022; the rule is read here as it stands after that notification. For a scheme that involves foreign shareholders, our legal consultation service can help with the structure.
Where a scheme of compromise, arrangement, merger, amalgamation, demerger, division or transfer of undertaking between Indian companies is approved by the NCLT or another competent authority, the transferee or new company may issue equity instruments to the existing non-resident shareholders of the transferor company if (a) the issue complies with entry routes, sectoral caps or investment limits and attendant conditions, and (b) none of the companies is in a sector prohibited for foreign investment. A Note says Government approval is not required for mergers and acquisitions in automatic route sectors. Listed-company schemes must follow the SEBI LODR Regulations, 2015.
Rule 19(1): what the 2022 substitution says
S.O. 1802(E), the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022 (12 April 2022) substituted sub-rule (1) of rule 19. As substituted: where a scheme of compromise or arrangement or merger or amalgamation of two or more Indian companies, or a reconstruction by way of demerger or otherwise of an Indian company, or transfer of undertaking of one or more Indian company to another Indian company, or involving division of one or more Indian company, has been approved by the National Company Law Tribunal (NCLT) or other authority competent to do so by law, the transferee company or the new company, as the case may be, may issue equity instruments to the existing shareholders of the transferor company resident outside India, subject to these conditions:
- (a) the transfer or issue is in compliance with the entry routes, sectoral caps or investment limits, as the case may be, and the attendant conditionalities of investment by a person resident outside India. Proviso: where the percentage is likely to breach the sectoral caps or the attendant conditionalities, the transferor company or the transferee or new company may obtain necessary approval from the Central Government.
- (b) the transferor company or the transferee company or the new company is not engaged in any sector prohibited for investment by a person resident outside India.
Note: Government approval shall not be required in case of mergers and acquisitions taking place in sectors under automatic route.
Comparison with the 2019 text
| Point | As notified (17 October 2019) | Rule 19(1) as substituted (12 April 2022) |
|---|---|---|
| Schemes covered | Merger or amalgamation of two or more Indian companies; reconstruction by demerger or otherwise | Adds compromise or arrangement, transfer of undertaking and division |
| Competent authority | NCLT or "competent authority" | NCLT or other authority competent to do so by law |
| Who receives shares | "existing holders" of the transferor company resident outside India | "existing shareholders" of the transferor company resident outside India |
| Condition (b) | "shall not engage in any sector prohibited" | "is not engaged in any sector prohibited" |
| Note on automatic route | None | Added |
The rule is permissive on approval: the proviso says the companies "may obtain" Central Government approval where a breach of a cap or condition is likely.
Rule 19(2): listed companies
Sub-rule (2) says that where a scheme of compromise or arrangement or merger or amalgamation of two or more Indian companies, or a reconstruction by way of demerger or otherwise of an Indian company, has any company listed on a recognised stock exchange in India, the scheme of arrangement shall be in compliance with the SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015. S.O. 1802(E) inserted the words "compromise or arrangement or" after "where a scheme of". The LODR Regulations are named as printed; the reader should check the current SEBI instrument.
What the Master Direction says
The Reserve Bank's Master Direction - Foreign Investment in India, updated up to June 15, 2026, sets out the rule in paragraph 6.15.1 with the same coverage. Its conditions differ in wording from the Rule, and the Master Direction itself says the notification prevails (paragraph 1.1):
- It adds a requirement for reporting in Form FC-GPR or FC-TRS, as the case may be, alongside compliance with the entry routes and caps. The Rule's text says nothing of forms.
- It says that if the investment is likely to breach the sectoral caps or conditions, the companies "should obtain necessary Government approval". Rule 19(1)(a) proviso says "may obtain necessary approval from the Central Government".
- It says that the companies "should not be in a sector prohibited", which matches clause (b).
- It does not carry the Note on mergers in automatic route sectors, which is printed in the Rule.
The Rules and the Master Direction therefore differ on the proviso verb and on the Note. This article states rule 19 as the Gazette notification gives it; the reader should confirm the point against the official text before relying on the Note. Forms are explained in our articles on Form FC-GPR, Form ESOP, Form DRR and the LLP returns and Form FC-TRS.
How the Companies Act fits
The scheme itself is a Companies Act matter; see our guides on section 232 of the Companies Act, 2013 (merger and amalgamation) and, for mergers with a foreign company, section 234 of the Companies Act, 2013. Rule 19 covers only mergers between Indian companies. A merger of an Indian company with a foreign company is governed by the Cross Border Merger Regulations, 2018, explained in our article on inbound merger regulations 1 to 4. For further reading on structuring, see cross border mergers: rules for Indian and foreign companies.
A worked example
Lakshya Components Limited, an Indian company with a non-resident shareholder, Nordvik Holdings, proposes to merge into Pelican Industries Private Limited under a scheme approved by the NCLT. Pelican may issue shares to Nordvik as the existing non-resident shareholder of Lakshya, if the issue respects the entry route and cap for Pelican's business and neither company is in a sector prohibited for foreign investment. If both are in an automatic route sector, the Note says no Government approval is required; if the issue would breach the cap, they may seek approval from the Central Government. If Lakshya is listed, the scheme must also comply with the SEBI LODR Regulations, 2015.
Need help with a merger involving foreign shareholders?
Foreign shareholders add FEMA conditions to an NCLT scheme: cap, route, prohibited sectors and reporting. Our legal consultation team can review the scheme against rule 19 before it is filed.
Key takeaways
- Rule 19(1) was substituted on 12 April 2022 and now covers compromise, arrangement, merger, amalgamation, demerger, transfer of undertaking and division.
- Shares may be issued to existing non-resident shareholders of the transferor company if route, cap and prohibited-sector conditions are met.
- A Note says no Government approval is needed for mergers and acquisitions in automatic route sectors.
- Listed-company schemes must follow the SEBI LODR Regulations, 2015.
- The Master Direction differs in wording and omits the Note; confirm against the official text.
Read next
- Regulations 1 to 4 of the FEM (Cross Border Merger) Regulations, 2018: inbound mergers
- Schedule I paragraph 2 of the FEM (Non-debt Instruments) Rules, 2019: sectors prohibited for foreign investment
- Rule 21 of the FEM (Non-debt Instruments) Rules, 2019: pricing of shares issued to non-residents
- Cross-border mergers under regulation 9 and deemed RBI approval
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.