Sneak peek into india’s latest fdi policy
Unanticipated outbreak of the global pandemic and nationwide- lockdown caused by the Novel Coronavirus (COVID-19) has jeopardized individuals and economy as a whole. In order to abate the impact on the general public, business establishments, and managing the current situations, the Government of India is diligently tracking all possible routes through which situation can be controlled by way of issue of amendments, advisories and various announcements, amongst the others.
Department for Promotion of Industry and Internal Trade (DPIIT) vide its Press note 3 (2020), dated April 17, 2020 (“Press Note”) has revised the existing regulatory framework on foreign investments in India.
The Press Note highlights the concerns of the probable unaccredited hostile takeovers resulting from the economic turbulence across the globe. Therefore, in order to curb the opportunistic takeovers/acquisitions of Indian companies, the current FDI Policy now mandates ‘prior Government Approval’ (Approval Route) for all foreign investments in case if the origin of such foreign investments is from such countries that “share land borders” with India.
Countries sharing land borders with India are China, Bangladesh, Nepal, Pakistan, Bhutan, Myanmar and Afghanistan (as per Ministry of Home Affairs data).
Now, foreign investment by any entity situated in above-mentioned countries or in case the beneficial owner of the investment, either entity or is a citizen of such above-mentioned countries, then it shall require prior Government Approval (as per Press Note). It is pertinent to mention herein that transfer or existing or future FDI in an Indian entity (directly/indirectly) which results in change in beneficial ownership shall also require prior Government Approval.
Changes effected by the Press Note
Earlier FDI policy:
As per 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.
Exceptions: Citizen/Entities of Bangladesh can invest only under Government Route. Also, Citizen/Entities of Pakistan can invest, only under the Government Route in sectors other than defense, space, atomic energy and sectors prohibited for foreign investments.
Modified FDI policy:
As per Para 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.
Exceptions:
#1. An entity of 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.
#2. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy and sectors/activities prohibited for foreign investment.
As per Para 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 the beneficial ownership will also require Government Approval.
Therefore, the modified and newly inserted lines of the Press Note clarifies that the intent of Government is to regulate and bring foreign investments under the Government/Approval route in order to curb potential opportunistic takeovers, acquisition of Indian Companies due to the current COVID-19 pandemic.
Grey areas: from the point of view of companies act, 2013
Any new (proposed) company whose investors/beneficial owners are from countries sharing land borders with India would require Government Approval. Currently, name approval process would not require any prior government approval except CRC/MCA requirements.
Clarity is still to be provided by Government in case of Companies, which are already under the process of Incorporation or Incorporation certificates are yet to be issued, on whether prior government approval would be required in case of those companies which involves foreign investors who are situated in Countries sharing land borders with India.
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