“Get the latest on India’s FDI policy changes with Press Note-3 dated 17.04.2020. Explore the revised FDI rules concerning investment from land border-sharing countries amid the COVID-19 pandemic. Understand the new conditions, including the government route for specific entities, and the impact on foreign direct investment. Stay informed on the automatic and approval routes, and the key considerations arising from these regulatory updates. Discover the countries sharing land borders with India and the implications for their investors. Get insights into beneficial ownership and its role in determining FDI eligibility under the updated policy.”
The Government of India has reviewed the extant FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017
Present Position: Para 3.1.1: 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.
Revised Position : Para 3.1.1
3.1.1(a) 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 any 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.
3.1.1(b) 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 the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.
The countries which share a land border with India are Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan (“Bordering Countries“).
Usually, foreign direct investment (FDI), which is when foreign entities invest in a company in another country, can be routed into India through two routes.
1. Automatic Route
2. Approval Route
The automatic route allows FDI without any prior approval from the RBI or the Government and applicable for sectors such as e-commerce activities, electronic systems, and ports & shipping, among others. A formal notification is required, but no approval.
The approval route requires the prior approval of the Government. The entity proposing to invest has to apply through the Foreign Investment Facilitation Portal, which provides a single-window clearance system, after which it is sent to the concerned Ministry. The Ministry, in consultation with the Department of Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce, will then approve or reject the application.
In terms of the Press Note 3
(i) all investments by entities incorporated in 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 any such country” (“Restricted Investor“) will require prior approval of the Government of India; and
(ii) in the event of any transfer of ownership of any existing or future foreign direct investment (“FDI“) in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of (i) above, such change in beneficial ownership will also require prior government approval.
The Press Note changes the FDI Policy in two fundamental respects: First, it expands the list of countries whose investors are no longer eligible to invest in India under the automatic route. Second, an investment in India – that would otherwise fall under the automatic route – now falls under the government route if it is from an entity whose “beneficial owner” is from such Bordering Country. These changes have far-reaching implications on the overall FDI regime. Set out below are some key considerations arising from these changes.
Country that shared land Boarder: Pakistan, China, Bangladesh, Myanmar, Nepal and Bhutan clearly fall into this category, but there is ambiguity over disputed territories such as Afghanistan and, more importantly, Macau and Hong Kong, both being part of the People’s Republic of China (PRC), and Taiwan. The political and legal status of these regions is contentious. Macau and Hong Kong are Special Administrative Regions of the PRC with separate governing and economic systems. Taiwan has historically operated as an independent country. The FEM Rules, read in line with international law would mean investments from any region forming part of PRC would be considered to be prohibited. Hong Kong would be construed as “sharing a land border with India,” but Taiwan, possibly not.
Beneficial Owner: FEM rules include references to beneficial ownership. This ensures that the restriction on investment imposed by the government will not be bypassed by Chinese entities that attempt to make investments in India indirectly. Given that FEM rules do not define beneficial ownership, reference should be made to related legislation, namely the Companies Act, 2013, which prescribes a threshold of 10% ownership for determining beneficial holding, and the Prevention of Money Laundering Act, 2002 (PMLA), which prescribes a threshold of 25% ownership for determining the beneficial holding for companies and a threshold of 15% for other unincorporated entities.
FEM rules do not prescribe any threshold for determining beneficial ownership and, as a result it could be argued that a nominal or miniscule ownership held beneficially by a person resident in, or a citizen of a country that shares a land border with India, could potentially render the entire body of funds being precluded from investment in India under the automatic route. While the government has clarified that beneficial ownership is to be interpreted in line with the PMLA in the context of public procurement, clarity in respect of Press Note 3, is still awaited.
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