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Alerts:

Regulatory Alert: Changes in FDI Policy

20 April 2020

Background

The existent Foreign Direct Investment Policy, 2017 (FDI Policy) permits all non-resident entities to invest in India subject to the FDI policy, except in certain prohibited sectors / activities along with some additional restrictions placed only on citizens and corporate entities from countries like Bangladesh and Pakistan.

In pursuance of efforts taken by the Government of India to combat the negative effects of COVID-19 pandemic, particularly in form of hostile takeovers/acquisition of Indian entities, the Ministry of Commerce and Industry, Government of India, vide its Press Note[1] 3 (2020 Series) dated 17 April 2020, amended the extant FDI Policy imposing restrictions on non-resident entities based in countries that share land border with India.

Highlights of the amendment in FDI Policy are as under:

  • Any investment from non-resident entity, based in country sharing land border with India, can invest in India only after taking prior approval of Government of India.
  • Any investment, where its ‘Beneficial Owner’ is situated in or is citizen of country sharing land border with India, can invest in India only after taking prior approval of Government of India.
  • Any incident of ‘transfer of ownership’ of existing or future foreign direct investment in an entity in India, resulting in beneficial ownership falling under this new restriction as mentioned above, will also require a prior approval of Government of India.
  • The new restrictions will apply to all countries sharing land border with India, which includes China, Bangladesh, Afghanistan, Nepal, Bhutan and Myanmar.
  • 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.
  • The press note also states that the decision will “take effect from the date of FEMA notification” which is yet to be released.

BDO Comments

The impact of coronavirus pandemic on the Indian economy has been disruptive amidst valuation of Indian businesses which are plunging. The Government of India has been taking variety of measures to tackle this situation and this FDI Policy change is an attempt by the Government to prevent any kind of un-invited takeover of Indian business. Covid-19 impacted countries like Spain and Italy have also recently announced measures to protect domestic businesses from hostile takeovers.

Regarding this change, it would be important to understand the meaning of the term ‘beneficial owner’ and how the same needs to be determined. Currently, this term is not defined in the press note. Accordingly, one would need to wait till FEMA notification is out in this regard. This change would also warrant evaluating need for the Government approval on any ongoing transactions or investment commitments and wherever such an approval is required, the impact on the timelines.