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Essential Corporate News – Week ending 1 November 2024
On 30 October 2024, the Chancellor of the Exchequer delivered the Autumn Budget 2024.
Global | Publication | July 2024
Foreign investment in India is governed by the Foreign Exchange Management Act, 1999 and the rules and regulations thereunder (“FEMA”), including the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (as amended from time to time) (the “NDI Rules”). Accordingly, all Indian persons (including Indian companies) either looking to receive foreign investment or obtaining foreign investment are required to comply with these laws and regulations including entry route norms, sectoral caps, investment limits and pricing guidelines, as applicable.
The Government of India reviewed its foreign investment regime of India with the objective of curbing opportunistic takeovers and acquisitions of Indian companies due to the COVID 19 pandemic. On April 17, 2020, the Ministry of Commerce, Government of India issued Press Note 3 (2020 Series) (“PN 3/20”) amending the then extant Foreign Direct Investment Policy (“FDI Policy”). The concomitant amendments made to the NDI Rules (“NDI Amendment Rules”) pursuant to PN 3/20 came into effect on April 22, 2020. Related amendments were also made to the FDI Policy on October 15, 2020.
The foreign direct investment laws in India as they stood prior to the NDI Amendment Rules, provided that a person being a citizen of Bangladesh or Pakistan or being an entity incorporated in Bangladesh or Pakistan cannot invest in an Indian company without the prior approval of the Government of India. Further, any citizen of Pakistan or an entity incorporated in Pakistan is not permitted to invest in defense, space, atomic energy and sectors or activities prohibited for foreign investment at all. The NDI Amendment Rules read with PN 3/20 expanded the scope of these restrictions briefly summarized below:
Consequently, investments from countries like China, Nepal, Myanmar, Bhutan and Afghanistan, in addition to Bangladesh and Pakistan (countries that share a land border with India) in India, would also be subject to the prior approval of the Government of India. Further, the use of the expression ‘directly or indirectly’ in PN 3/20 and the NDI Amendment Rules also implies that an overseas acquisition of an entity by an investor from any of the aforesaid countries, which, upon completion, will result in an indirect acquisition/change in shareholding resulting in acquisition of beneficial interest of an Indian company, will be covered within the ambit of the amendments and such transaction will require the prior approval of the Government of India.
Under a notification dated December 8, 2020, it was clarified that investments by Multilateral Banks or Funds of which India is a member are not covered by the aforesaid requirements.
Accordingly, there are a few key aspects which should be analysed, with respect to investments in India from any of the aforementioned countries, which are as follows:
Although there are seven countries that share land borders with India, the immediate fallout of the amendments is their impact on investments in India from China including Hong Kong and Macau. In line with PN 3/20, the Government of India has also amended some procedural rules as prescribed under the (Indian) Companies Act, 2013 including (i) requiring new directors (being nationals of countries sharing a land border with India) to obtain security clearance from the Government of India prior to their appointment in an Indian company; and (ii) requiring new investors to provide relevant declarations stating their compliance with PN 3/20 in relation to acquisition of securities of an Indian company through fresh offer or transfer of securities.
While the world has moved on from the COVID-19 pandemic, however, India is strictly adhering to the above revised norms under the FDI Policy.
Mr. Sandeep Mehta, Partner, J. Sagar Associates, Mumbai, India (sandeep.mehta@jsalaw.com).
This article and the contents hereof do not, and are not intended to, constitute legal advice. Readers of this article should seek appropriate legal advice with respect to any matter or issue.
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