In the wake of the economic and financial crisis caused by the COVID-19 pandemic, India has revised its foreign direct investment (FDI) policy through Press Note 3 of 2020 (Press Note) imposing stricter norms on foreign investments in Indian companies from an investor based out of bordering countries. The primary objective of the revised FDI policy is to curb any opportunistic takeovers or acquisitions of Indian companies during the COVID-19 pandemic.
Under the amended FDI policy, a mandatory 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 country which shares land borders with India. It may be helpful to note that the newly introduced restrictions do not prohibit foreign investment from bordering countries into India but only seek to regulate future foreign investments into India or transfer of existing Indian investments to beneficial owners located in bordering countries. Among the border countries, China is the only land neighbouring country of India who makes substantial foreign investments into India. The legal amendments and details on operational modalities are yet to be notified by the Indian government. In this update, we discuss some key takeaways and potential implications from this revised FDI policy.
Under the Indian FDI framework, a non-resident entity is allowed to invest in all sectors except certain prohibited sectors (such as tobacco, lottery and atomic energy). The FDI policy generally allows foreign investors (except for investors based out of Pakistan and Bangladesh who need to obtain prior government approval) to make foreign investment in most sectors under the automatic route (i.e. without government approval) subject to sectoral conditions.
The amended FDI Policy seeks to narrow the scope of eligible investors who are allowed to invest under the automatic route. Under the new rules, any foreign investment by a non-resident based out of a country that shares a land border with India will require the prior approval of the government irrespective of the sector into which the investment is being made. India shares a land border with China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan (Restricted Country). This investment approval requirement also extends to: (i) those investments, where the beneficial owner (corporate or individual) is situated in the jurisdiction of a Restricted Country; or (ii) a direct or indirect transfer of ownership of any existing or future investment, which results in the beneficial owner being from a Restricted Country.
At present, the government has not notified the underlying amendments and in the absence of finer details, there are certain key issues which the government needs to clarify soon.
The changes under the Press Note are in the context of foreign direct investment and would not apply to foreign investments in the public securities market (i.e. foreign portfolio investment (FPI)). At present, it is unclear if a similar change would be introduced in the FPI regime, but SEBI has recently issued directions to custodian banks to disclose details of ultimate beneficial owners of foreign portfolio investors based in China and Hong Kong. This is also relevant for non-mainland China and Hong Kong funds where limited partners may be based in China.Download PDF to read more
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