Corporate: Legal Milestones Financial Year 2020-21 And A Look Ahead

THE YEAR THAT WAS

2020 was a year that witnessed global disruptions, economic downturn and volatility owing to the ongoing COVID-19 pandemic. In the wake of the pandemic, the Government of India undertook several regulatory and legal reforms with the aim of curtailing the economic slump and bolstering foreign investment, while simultaneously suppressing opportunistic takeovers/acquisitions of Indian companies.

The tone of the reforms initiated over the course of the year has been underscored by the concept of ‘Atmanirbhar Bharat’ (self-reliant India).

MAJOR DEVELOPMENTS IN THE FINANCIAL YEAR 2020-2021

• Foreign Direct Investment Regime
  • Press Note 3

    The Department for Promotion of Industry and Internal Trade (DPIIT) issued Press Note 3 of 2020 on 18 April 2020 (Press Note 3 of 2020), imposing stricter norms on foreign investments in Indian companies from an investor based out of China and other bordering countries (i.e., Afghanistan, Bangladesh, Bhutan, Myanmar, Nepal, and Pakistan) (Restricted Country). Investments from Hong Kong and Taiwan are also covered by Press Note 3 of 2020.

    Pursuant to this amendment, prior government approval will now be required for any foreign investment in or acquisition / transfer of an Indian company (directly or indirectly), where the acquirer or beneficial owner of such investment is based out of a Restricted Country. This is regardless of whether or not such investment falls in a sector under the ambit of approval route (i.e. requires prior government approval for FDI) or not under the FDI policy. Further, transfer of ownership of any existing or future FDI into an Indian entity (directly or indirectly), resulting in beneficial ownership by an entity, or a person who is situated in or is a citizen, of a Restricted Country now requires prior government approval.

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  • Other FDI Related Changes
    • Increase in FDI limit in the insurance sector: The Insurance (Amendment) Act 2021 which received Presidential assent on 26 March 2021, amends the Insurance Act, 1938 to increase the FDI limit under the automatic route (i.e., without prior government approval) for the insurance sector from 49% to 74%. This amendment has been made effective from 1 April 2021.
    • Further liberalization of FDI norms in the Indian defence sector: The FDI limit under automatic route for the defence industry was increased from 49% to 74%. FDI beyond 74% is permitted under the approval route, provided that such investment is likely to result in access to modern technology. Further, infusion of fresh foreign investment (up to 49%) in a company not seeking an industrial license will now require government approval in the event such investment results in (a) change in the ownership pattern of the company; or (b) transfer of stake of an existing investor to a new foreign investor.

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