BACKGROUND

Foreign Investment in India is regulated in terms of clause (b) sub-section 3 of Section 6 and Section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017. These Regulations are amended from time to time to incorporate the changes in the regulatory framework and published through amendment notifications.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on Foreign Direct Investment (FDI) through Press Notes/ Press Releases which are notified as amendments. Under the Foreign Direct Investments (FDI) Scheme, investments can be made by non-residents through two routes, i.e., Automatic Route and the Government Route.

FDI in the majority of the sectors is under the Automatic Route, i.e., allowed without any regulatory approval prior to such investment. In other words, FDI in most sectors don’t require prior regulatory approval from the Government of India. Eligible investors can invest in most of the sectors of Indian Economy on an automatic basis.

CHAPTER 3 (GENERAL CONDITIONS ON FDI)

The said Chapter interalia provides the meaning of eligible investors, eligible investee entities, instruments of investments etc.

 Clause 3.1.1 of Eligible Investors provides that –

“A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.”

AMENDMENT – PRESS NOTE NO. 3(2020 SERIES)

 The Government of India has reviewed the extant FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to COVID-19 outbreak and amended para 3.1.1 as contained in Consolidated FDI Policy, 2017.

The revised Paras 3.1.1 (a) and (b) have been extracted for ease of reference:

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. However, an entity of a 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. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

 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 beneficial ownership will also require Government approval.

 ANALYSIS

(i) Earlier only Bangladesh and Pakistan (some sectors were / are prohibited for Pakistan) were mandated to make investment through Government route as restrictions were placed on them

(ii) However, after this amendment, non-resident entities have to take regulatory approval in case-

• their respective countries share land border with India; or
• beneficial owner is situated in or is a citizen of countries which shares land border with India

(iii) Transfer of ownership of Indian companies arising out of FDI investments from neighbouring countries will now also be subject to government approval

OUR COMMENTS 

The current circumstances due to unprecedented COVID-19 in the country have put all the organisations under distress. The amendment in the FDI Policy would definitely curb opportunistic takeovers or acquisitions of Indian companies due to the current COVID-19 pandemic. Though Indian Government did not name China, however, it is obvious that the objective is to prevent hostile takeovers by Chinese companies.

On the otherhand companies / brands like BigBasket, Paytm, Ola, MakeMyTrip, Zomato etc. are backed by the investors from China through which they have received millions / billions of dollars as investments. These companies would get affected more as investors from China Investors will now be required regulatory approval prior to fresh investment. Undoubtedly, fresh investment from the existing investors in such companies will enhance the timelines for closing a deal.

As per Media reports, China has reacted after the decision of the Government of India and claimed that the additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment  China has been anticipating that India would revise the relevant discriminatory practices and treat investments from different countries equally while fostering an open, fair and equitable business environment.

It would be an interesting proposition to see as to whether any fast track mode / time bound process will be implemented for regulatory approvals since the Indian Government is required to take all measures to boost economic growth once lockdown is over.

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Disclaimer 

The views expressed in this article are the personal views and for informational purposes only. The information which is summarized herein does not constitute a professional / legal advice. A detailed and thorough examination of the facts and circumstances of a particular situation are always needed for any legal opinion / advice.