After an intense second wave of the Covid-19 pandemic, the third quarter of 2021 saw a return to a semblance of normalcy. M&A activity picked up with investors focussing on the long-term potential of the Indian economy. Technology companies, in particular, benefitted from the rapid adoption of technology as a consequence of the pandemic and enhanced investor confidence, with a string of start-ups gearing up for public listings.
Exchange Control Laws
Foreign investment limit in the insurance sector enhanced
Foreign investment limit in the insurance sector (including private banks with insurance joint ventures or subsidiaries) was raised from 49% to 74%, paving the way for foreign majority ownership and control. While investment up to 74% is now under the automatic route (i.e., no prior government approval is required), such investment proposals will be subject to approval of the insurance regulator, the Insurance Regulatory and Development Authority of India. An insurance company with foreign investment will also need to ensure that the majority of its directors and key managerial persons are resident Indian citizens.
Foreign investment limit in the telecom sector enhanced
As part of a package of reforms for the ailing telecom sector, the Union Cabinet on 21 September 2021 approved an increase in the foreign investment limit from 49% to 100% under the automatic route. The Department for Promotion of Industry and Internal Trade (DPIIT) released Press Note 4 of 2021 on 6 October 2021, which was followed by a formal amendment to the Foreign Exchange Management (Non-Debt Instruments), Rules 2019 (NDI Rules) on 12 October 2021. This move is aimed at increasing liquidity and encouraging investment in a sector which has been plagued by numerous regulatory challenges coupled with declining tariffs over the past few years.
Foreign investment limit in oil and gas public sector undertakings enhanced
To facilitate the privatisation of Bharat Petroleum Corporation Limited (India’s second-largest oil refiner), the Government issued a press note in July 2021 to permit foreign investment up to 100% under the automatic route for oil and gas public sector undertakings (PSUs). This applies if ‘in-principle approval’ of the Government has been obtained for strategic disinvestment. The sectoral cap continues to remain at 49% under the automatic route for investment in oil and gas PSUs for which there are no plans of disinvestment or dilution of equity. The NDI Rules have since been amended on 5 October 2021 to incorporate these changes.
NRI investments excluded from calculation of indirect foreign investment
A clarification was released regarding the manner of calculating ‘indirect foreign investment’. Investments made on a non-repatriable basis by an Indian entity which is owned and controlled by Non-Resident Indians (NRIs) are now explicitly excluded from the calculation of indirect foreign investment. This follows from the principle that investments made by NRIs on a non-repatriable basis are treated at par with investments by resident Indians.
Limited Liability Partnership (Amendment) Act, 2021
The Limited Liability Partnership (Amendment) Act, 2021 (LLP Amendment Act) seeks to amend certain provisions of the Limited Liability Partnership Act, 2008 (LLP Act) and decriminalise certain offences to facilitate ease of doing business for limited liability partnerships (LLPs). While the LLP Amendment Act received Presidential assent on 13 August 2021, the Central Government is yet to notify the date on which the amendments will come into force.
The LLP Amendment Act proposes the following key changes:
Certain offences decriminalised
It decriminalises 12 compoundable offences, including non-compliance with provisions relating 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.
Concept of ‘small LLP’ introduced
The concept of a 'small LLP' (akin to a small company under the Companies Act, 2013) has been introduced. A small LLP has been defined as an LLP with a contribution of less than INR 25 lakhs and annual turnover of less than INR 40 lakhs (with the government retaining the power to extend these limits to INR 5 crores and INR 50 crores, respectively). Small LLPs will be subject to lower monetary penalties compared to other LLPs – a benefit which has also been extended to LLPs which meet the qualification criteria for ‘start-ups’, as prescribed by the DPIIT.
The enhancement of foreign investment limits, particularly in the insurance sector, should encourage further deal activity, not just in the form of enhanced foreign investment, but also consolidation in the cash deprived life insurance sector. There are still question marks on whether a similar impact can be expected in the telecom sector. This will largely be a function of whether the much needed reforms package has done enough to regain investor confidence in a sector which remains at the risk of becoming a duopoly.
Another potentially interesting regulatory development is the proposal of the Reserve Bank of India (RBI) to liberalise overseas investment regulations dealing with ‘round tripping’ (an Indian resident investing in an overseas entity, which in turn makes investments into India). Presently, there is effectively a blanket restriction on such transactions, irrespective of the amount or proportion of investment into India by the overseas entity or the source of funds used for such investment. Based on draft regulations released by the RBI (which are presently open for public comments), such investments will be permitted so long as they are not undertaken for tax avoidance purposes.