FEMA Rule 7(2) Explained: Bonus Shares Allowed to Foreign Shareholders in Prohibited Sectors (2025 Update)

In June 2025, the Government of India notified key amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. These changes make it simpler for certain Indian companies to issue bonus shares to their non-resident shareholders—without altering their ownership percentage. Here’s what every entrepreneur, investor and finance enthusiast should know.

What’s new—and why it matters

1. Who’s covered?
   Companies in sectors where fresh foreign direct investment (FDI) is usually prohibited under the automatic route.

2. What can they do?
   Issue bonus shares to their existing non-resident (i.e. overseas) shareholders.

3. Key caveat:
   The overall shareholding percentage of those non-resident investors must stay exactly the same after the bonus issue.

4. Retroactive relief:
   Any bonus shares already given out (before these amendments) will be treated as valid under the FEMA regulations in effect at that time—so no one has to worry about past compliance gaps.

The exact rule references

• Rule 1(1) & (2)

  • Short title: These are officially called the “Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2025.”

  • Effective date: They came into force immediately upon gazette notification.

• Rule 7(1) & (2)

  • 7(1): Simply renumbers the old Rule 7 to maintain continuity.

  • 7(2): Introduces the new bonus-shares permission for non-residents, with the “same percentage” requirement and grandfathering clause. 

Why this change was introduced

• Encourage equity rewards: Companies can now reward their global shareholders even in restricted sectors.

• Maintain fairness: By locking share-percentage, no fresh stake is created—just a redistribution of existing equity.

• Legal certainty: Past bonus issues automatically comply, so no retrospective filings or penalties.

Practical takeaways for businesses

• ✅ Board approval: As always, board and shareholder resolutions are needed before issuing any bonus shares.

• ✅ Valuation & accounting: Ensure bonus-share ratios and accounting entries reflect the exact “same percentage” outcome.

• ✅ Regulatory filings: Update RBI/FEMA returns—though no special permission is required under the automatic route.

• ✅ Communicate clearly: Notify your non-resident investors of their unchanged percentage holding, with fresh share certificates if needed.

Frequently Asked Questions

Q1: Can a new foreign investor subscribe to these bonus shares?
No. The rule applies only to pre-existing non-resident shareholders; no fresh FDI is permitted.

Q2: What if a non-resident’s percentage would change under the bonus ratio?
You must adjust the ratio so that their post-bonus percentage equals their pre-bonus stake—otherwise, it’s not allowed.

Q3: Do I need RBI approval?
No separate approval is needed under the automatic route—just ensure you comply with the documentation and reporting requirements of FEMA.

Conclusion

The 2025 amendments offer a straightforward way for Indian companies in restricted sectors to recognize their international investors through bonus issues—while keeping their ownership stakes intact. By understanding Rule 7(2) and following standard corporate procedures, businesses can leverage this update to strengthen investor relations without triggering fresh FDI compliance hurdles.

Stay tuned to our blog for more updates on FEMA rules, trade finance best practices, and all things cross-border investment!