FEMA's Stance On Assured Returns: Navigating Prohibition And Judicial Leniency

India's foreign investment regime, governed by the Foreign Exchange Management Act, 1999 (FEMA), maintains a clear prohibition on providing "assured returns" on equity investments to foreign investors. This policy is designed to distinguish risk-bearing equity from fixed-return debt, prevent circumvention of regulations governing external borrowings, and manage foreign exchange outflows. However, while the regulatory text is stringent, Indian courts have adopted a pragmatic and pro-enforcement approach, creating significant and legally recognized pathways for investors to secure their exits.

As per Regulation 9(5) of the Non- Debt Instrument Rules, 2019 (NDI Rules) framed under the Foreign Exchange Management Act, 1999 (FEMA) – "... a person resident outside India holding equity instruments....may exit without any assured return, subject to the pricing guidelines prescribed..."