The Indian Government has always taken steps towards promoting foreign investor interests’ in the Indian businesses. Past initiatives such as “Make in India”, “Start-Up India” programs are live examples of attracting foreign investors to the Indian business market. Being in line promoting such initiatives, the Government of India has always worked towards drafting an effective, comprehensive and consolidated Foreign Direct Investment Policy (“FDI Policy”). As on current date foreign investment in India is governed by the Consolidated FDI Policy brought in effect from August 28, 2017 (“Policy 2017”) by the Department of Industrial Policy & Promotion (“DIPP”).

Through the medium of this Article, we try to analysis the recent revision made by the Government in the Policy 2017, thus affecting the approval route for foreign investment from certain countries and the definitions of an “Eligible Investor”.

Salient Features of Policy 2017:

We first take a look at certain important concepts/definitions under Policy 2017, namely:

  • FDI: means investment by a non-resident entity/person resident outside India;
  • Non-Resident Entity: means a person resident outside India as defined under FEMA;

For any investment to be allowed under Policy 2017, it necessarily satisfy the initial conditions under the following heads:

  • Eligible Investor;
  • Eligible Investee Entities;
  • Instruments of Investments, issue/transfer of Shares; and
  • Entry Routes of Investment.

While the Government is taking steps to promote foreign investment, it is also the Government’s duty to safeguard the local domestic market and country’s security respectively with certain checks and balances. Therefore, under the above-mentioned heading of “Entry Routes of Investment” in Policy 2017 exists the following entry channels to Indian business markets-

  • Automatic Route; and
  • Government Approval Route.

As the name suggests as per the provisions of Policy 2017, if a business falls under the Government Approval Route, a prior permission shall be obtained from the relevant government authority for investment for such business.

While government approval is required to ensure security and a monitoring mechanism, point 3.1.1 of Policy 2017 defines a category of “Eligible Investors” as-

“A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.”

By the above-mentioned explanation under Point 3.1.1, it is clear that, a citizen of Bangladesh & Pakistan can invest in India only through Government Approval Route, but such a Bangladeshi or Pakistani investor cannot invest in Indian business relating to defence, space, atomic energy in any circumstances.

Taking cue from this understanding of Eligible Investor, we now take a look at the recent change brought to the definition of “Eligible Investor”.

Revision of “Eligible Investor” Definition

The Government with an intent to curb opportunistic takeovers/acquisitions through the DIPP Press Note No. 3 (2020 Series) dated 17th April 2020 amended the entry of Eligible Investor under Point 3.1.1.

The revised position stands as:

“A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.”

By the said change, investors from the following countries are now mandated to invest in any business head through Government Approval Route Only:

  • Afghanistan;
  • Bangladesh;
  • Bhutan
  • China;
  • Myanmar;
  • Nepal; and
  • Pakistan.

The Press Note further adds Point 3.1.1 (b) stating that,

“In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of para 3.1.1(a), such subsequent change in beneficial ownership will also require Government Approval.”

This revision has been introduced when the world is battling Covid-19 pandemic. While the country and businesses are facing an economic crises due to the lockdown, there could be a scenario where businesses (especially start-ups) might wish to sell themselves to investors and earn some liquidity during the difficult cash-crunch times. On the other hand, investors with intent to invest at less equity rate may wish to enter the Indian business market.

Therefore, for any fresh investment or transfer of existing FDI to an investor (being resident of the above-mentioned countries) will require a check and Government’s nod.

The said revision shall come into full force and effect from the date of FEMA notification.

Conclusion: On one end this revision can be seen to save business (especially start-ups) from opportunist takeover/acquisition by foreign investors during the economic crises. On the other this revision could also be interpreted to have targeted China and Chinese investments particularly as a reply for the Covid-19 pandemic.

Author Bio

Qualification: LL.B / Advocate
Company: Artefact Projects Ltd.
Location: Maharashtra, IN
Member Since: 03 Apr 2020 | Total Posts: 2
Working towards providing professional services specializing in corporate and commercial laws. Providing legal advisory on corporate transactions, share transfer & purchase, drafting & vetting of various commercial agreements, conducting due diligence process start-up compliance & regist View Full Profile

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