The first quarter of 2022 witnessed the liberalisation of the Foreign Direct Investment regime and developments aimed at ease of doing business, setting the tone for a promising year of M&A activity.

Arnav DayalPartner

Yashita GourAssociate

Sanjna VijhAssociate

Following the trend from last year, 2022 began with frenetic deal making activity, despite the Omicron variant fueled third wave in India, and global headwinds on account of the Russia-Ukraine conflict, severe Covid-19 related lockdowns in China and inflation pressures in several major economies. On the regulatory front, steps were taken to further liberalise the FDI policy as well as promote the ease of doing business in India. These developments should help in furthering India’s position as a key investment destination.

Key Developments

  • Exchange Control Laws

    The Department of Promotion of Industry and Internal Trade (DPIIT) issued a press note dated 14 March 2022 (Press Note) introducing several changes to the Consolidated Foreign Direct Investment Policy, 2020 (FDI Policy). The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 were amended in line with these changes with effect from 12 April 2022.

    • Foreign investment in LIC

      A key change introduced by the Press Note permits up to 20% foreign investment in the Life Insurance Corporation of India (LIC) under the automatic route (i.e., without prior government approval). Last year, foreign investment limits in the insurance sector were raised from 49% to 74%, under the automatic route. However, LIC is governed by a separate legislation, i.e., the Life Insurance Corporation Act, 1956 (LIC Act) which had prohibited foreign investment in LIC. The change is aimed at facilitating the proposed listing of LIC.

      The Press Note specifies that any foreign investment in LIC will be subject to compliance with the provisions of the LIC Act and the Insurance Act, 1938, as well as applicable pricing guidelines specified by the Reserve Bank of India.

    • Other updates

      • Extension of period for repayment of Convertible Notes: The Press Note has increased the maximum permissible time period for repayment or conversion of convertible notes issued by companies recognised as start-ups by the DPIIT from 5 years to 10 years from the date of issuance.
      • Introduction of Share Based Employee Benefits: The Press Note has introduced the concept of 'Share Based Employee Benefits', defined to mean an issuance of capital instruments to employees, pursuant to share based employee benefits schemes formulated by a body corporate established or constituted by or under any Central or State Act. Previously, the FDI Policy only recognised issuance of ESOPs or sweat equity shares and the scope has been widened to include any other issuance of capital instruments to employees pursuant to share based employee benefits schemes. This aligns with the consolidated regulations issued by Securities Exchange Board of India (SEBI) in 2021 for the issuance of sweat equity shares and share based employee benefits which apply to ESOPs, sweat equity shares, stock appreciation rights schemes and employee stock purchase schemes.
      • Extension of the scope of acquisition of shares under schemes of mergers, demergers or amalgamations: Under the FDI Policy, special conditions apply to the issuance of shares by the transferee/new company to the shareholders of the transferor company resident outside India, under a scheme of merger, demerger or amalgamation. Such special conditions are: (i) percentage of shareholding of persons resident outside India being within the sectoral limits; and (ii) transferor or the transferee company not being engaged in activities prohibited by the FDI Policy. The scope of these conditions has been extended by the Press Note to include schemes of compromise or arrangement or reconstruction by ways other than a demerger, or the transfer of undertaking of one or more Indian company to another Indian company or involving division of one or more Indian company. Further, a proviso has been included to the first special condition clarifying that Government approval will be required in case of breach of sectoral caps or the conditionalities.
  • Limited Liability Partnership (Amendment) Act, 2021, and Limited Liability Partnership (Amendment) Rules, 2022

    As reported in the first issue of our e-magazine, the Limited Liability Partnership (Amendment) Act, 2021 (LLP Amendment Act) decriminalised 12 compoundable offences, including non-compliance with provisions with respect to: (i) minimum number of Indian resident partners, (ii) reporting change of designated partners, (iii) maintenance of books of account, and (iv) filing annual returns.  The LLP Amendment Act also introduced the concept of a 'small LLP' (akin to a small company under the Companies Act, 2013) which is subject to lower monetary penalties compared to other LLPs. The LLP Amendment Act was to come into force at a date notified by the Central Government. The Ministry of Corporate Affairs (MCA) has notified 1 April 2022 as the date on which the amendments come into force.

    In addition, the Limited Liability Partnership (Amendment) Rules, 2022 and the Limited Liability Partnership (Second Amendment) Rules, 2022 (together the LLP Amendment Rules) have also been notified with a view to streamlining governance and compliance for LLPs. The LLP Amendment Rules (i) clarify aspects relating to filings of annual returns and statement of account and solvency to be made by LLPs undergoing the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, and (ii) establish a procedure to adjudicate and appeal against the imposition of penalties under the LLP Act.

    The MCA also released a notification extending the application of certain provisions of the Companies Act, 2013 to LLPs. Some of these provisions which have been modified and applied to LLPs pertain to (i) maintenance of records of significant beneficial owners of the LLP, (ii) criteria for disqualification of designated partners and prohibition on acting as a designated partner in more than 20 LLPs, and (iii) procedural matters for inspection of books and records of an LLP, and taking cognisance of offences under the LLP Act.

  • Corporate Social Responsibility Compliance

    The Companies (Accounts) Amendment Rules, 2022 introduced the requirement of filing of Form CSR-2 annually upon companies for which CSR compliances apply (i.e., companies with a net worth of INR 500 crores or more, or companies with a turnover of INR 1,000 crore or more, or companies with a net profit of INR 1,000 crore or more). This new filing contains a report on CSR activities during the preceding financial year, and is to be filed on or before 31 March of the current financial year.

With continued liberalisation of the foreign investment regime, the list of restricted sectors has steadily reduced. This augurs well for investment opportunities in India. Consistent with this theme, another potentially interesting development is liberalisation of the space sector, which the Government has alluded to, following interest in recent years from private players. The proposed disinvestment in LIC may also pave the way for private participation in other historically government-owned undertakings.

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