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Regulatory Alert – Amendments to Consolidated Foreign Direct Investment Policy, 2020 (‘FDI Policy’)

24 March 2022


The extant FDI Policy permits the foreign investment into an ‘Insurance Company and Intermediaries/Insurance Intermediaries’ in the insurance sector. However, such Insurance Company does not include Life Insurance Corporation of India (‘LIC’) as the same is framed under a separate act viz., the Life Insurance Corporation Act, 1956 (‘LIC Act’). Further, the LIC Act does not provide for provision which allows foreign investment in LIC.  

Thus, in pursuance of the Government of India’s plan of launching Initial Public Offering (‘IPO’) of LIC this year, the Ministry of Commerce and Industry, vide its Press Note 1 (2022 Series) dated 14 March 2022, has amended the extant FDI Policy permitting foreign investment in LIC. The revised FDI Policy also provides for other consequent/relevant modifications for consistency and clarity.     

Key highlights of the amendment in FDI Policy are as under

I. Definitions  

  • The definition of ‘Capital’ is modified to include the issue of equity shares by a company incorporated under the special act.
  • The definition of ‘Convertible Note’ is revised to increase the conversion period from 5 years to 10 years.  
  • The definition of an ‘Indian Company’ is expanded to not only include a company incorporated in India under the Companies Act, 2013 but also the body corporates constituted by or under any central/state act. Further, the revised definition specifically excludes a society, trust, or any other entity which is specifically excluded as an eligible investee entity under the FDI Policy.
  • The following two new definitions are added:
    • ‘Share-Based Employee Benefits’ means any issue of the capital instrument to employees, pursuant to a share-based employee benefits scheme formulated by a body corporate established or constituted by or under any central or state act. 
    • ‘Subsidiary’ shall have the same meaning as is assigned to it under the Companies Act, 2013 as amended from time to time. 

II. Real Estate Business

  • The extant FDI policy prohibits foreign investment in prescribed sectors, one of which is the ‘Real Estate Business or Construction of Farmhouses’
  • The term ‘Real Estate Business’ is redefined to specify that FDI is prohibited only in such business which deals in land and immovable properties intending to earn profit. Foreign investment in Real Estate Investment Trusts (‘REITs’) registered and regulated under REIT Regulations, 2014 excluded from the definition of Real Estate Business. 

III. FDI in Insurance

  • FDI up to 20% is allowed in LIC under the automatic route, subject to terms and conditions specified therein.  
  • FDI under automatic route in Indian Insurance company increased from 49% to 74%, subject to terms and conditions specified therein. 

IV. Restructuring of the Indian company

Para 4 of Annexure 3 to the FDI Policy has been modified to provide for the issue of ‘Capital Instruments’ on the restructuring of an Indian company by way of a scheme of compromise or arrangement or merger or amalgamation of two or more Indian companies, or a reconstruction by way of demerger of transfer of one or more undertaking, approved by National Company Law Tribunal or other competent authority to do so by law.  ​

V. Share-based employee benefits

  • With the introduction of the definition of ‘Share-Based Employee Benefits’, an Indian Company is now allowed to issue the same to its employees and/or director (including that of its holding company, subsidiary company, and joint venture) who are resident outside India, subject to prescribed conditions. 
  • An Indian company issuing employees’ stock option or sweat equity shares shall file form ‘ESOP Reporting’ with the Foreign Exchange Department (in place of filing of form ESOP with the concerned regional office as required earlier), within 30 days of the issue. 

VI. The Press Note states that the above decision will ‘take effect from the date of FEMA notification’ which is yet to be released.

BDO Comments

The above amendment in the FDI Policy, allowing FDI up to 20% in LIC, comes ahead of the proposed IPO of LIC, which is expected to be the largest in the Indian Capital Markets to date. The other amendments are also aligning with the general business practice.