On April 17, 2020, the Department of Promotion for Industry and Internal Trade (“DPIIT”) issued Press Note 3 (2020) (“Press Note”) with the intention of curbing opportunistic takeovers/acquisitions of Indian companies due to current Covid-19 pandemic. On April 22, 2020, the Ministry of Finance issued a notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 to give effect to this Press Note.

Earlier, investors from Bangladesh and Pakistan could invest only with prior approval from the government. This has now been extended to (1) entities of any country, which shares land border with India (“Bordering Countries”), or (2) where the beneficial owner of an investment into India is situated in or is a citizen of a Bordering Country.

Another important change that has been made through this Press Note is that 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 with the restriction/purview of the above restriction, such subsequent change in beneficial ownership will also require government approval.

Not Applicable to FPI

Additionally, this Press Note is only applicable for foreign direct investment, not foreign portfolio investments from these countries. However, there are media reports that SEBI has stepped up surveillance on investments through the Foreign Portfolio Investment (“FPI”) route, and it is possible that changes may be made by SEBI in the FPI regime as well on the lines of the changes in the FDI policy. Further, this Press Notes does not in any way affect the operations of Indian companies that have already received investment from Bordering Countries.

Need for Clarity on ‘Beneficial Owner’

The Press Note will also impact investments originating from any country where the investment vehicle has beneficial owners from a Bordering Country.

The Press Note does not define the term “beneficial owner”. The term “significant beneficial owner” as defined under section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018 is broadly limited to persons holding beneficial interest of at least 25% or those who exercise significant influence or control in the company through other means.

The absence of the word “significant” from the Press Note may lead to an interpretation that if the beneficial owner of a foreign investor is a citizen or situated in a Bordering Country and holds even one share, then such investment will require prior government approval. A clarification on the definition of beneficial owner from the Government would be crucial in getting further guidance on this.

In the meanwhile, Indian companies receiving FDI will have to be cautious and carry out due diligence regarding the beneficial owners of the foreign investor. Given the complexity in determining beneficial ownership, Indian investee companies would probably rely on undertakings from the foreign investor.

Process for Approval of Such Investments

Further, it is important to note that there is no prohibition on foreign investment from such Bordering Countries. The amendment made by the Press Note is that such investments will require prior government approval. For investment through the government approval route, there is a well-established Standard Operating Procedure (“SOP”) (issued by DPIIT on June 29, 2017) for processing FDI proposals under the government route. The investments proposals from such Bordering Countries could be scrutinised as per this SOP.

All FDI proposals from such Bordering Countries would also have to be filed online on the Foreign Investment Facilitation Portal.

The SOP also provides the time limit for approval of all FDI proposals. Approval/rejection letters have to be issued to the applicants within eight weeks in case no security clearance is required or within ten weeks in case security clearance is required. In term of the SOP, investments from Pakistan and Bangladesh require security clearance from the Ministry of Home Affairs. Though it has not been mentioned as such, it is likely that FDI proposals from other Bordering Countries may also require security clearance.

In terms of the SOP, a joint quarterly review meeting is held under the chairmanship of Secretary, DPIIT and Secretary, DEA on pendency of proposals with Government. This indicates that the Government has been quite keen not to allow any unnecessary delay in disposal of FDI proposals filed for approval. 

Conclusion

It is important to note that the Press Note has been issued specifically with reference to the current Covid-19 pandemic. It is possible that once the pandemic is under control, this Press Note may be modified though it is expected to take quite some time before that happens.

This post has been contributed by Ms. Vaneesa Agrawal, Founder, Thinking Legal.

This article was first published in Medium.

[DISCLAIMER:  This article is for academic purpose and is solely to provide readers with general information regarding developments in Indian law. The information contained herein does not constitute legal or a professional advice.]