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22 April 2020
Government reviews Foreign Direct Investment Policy against COVID-19 background
 
The Government of India has issued a Press Note 3 of 2020 on 17 April 2020, making changes to Foreign Direct Investment Policy (FDI) 2017, as under
 
Amendment to FDI Policy 2017
  1. The amendments are sought to be made to para 3.1.1 of the FDI Policy 2017, which deals with ‘eligible investors. The existing para and revised para are given below in a comparative table for ease of understanding:
    Existing Para 3.1.1 Revised Para 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, 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 defense, space, atomic energy, and sectors/activities prohibited for foreign investment. 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 a land border with India or where the beneficial owner of an investment in 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 defense, space, atomic energy, and sectors/activities prohibited for foreign investment.
  2. It further provides by way of para 3.1.1(b) that, ‘in the event of transfer of ownership of any existing of future FDI in an entity in India, directly or indirectly, resulting in 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.’
     
  3. It can be noted that India shares a land border with Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, China, and Afghanistan.
  4. The effect of the aforesaid amendments would be as follows:
    1. Prior approval of Government will be required for proposals involving FDI from countries sharing a land border with India or if the beneficial interest lies with any such entity;
    2. Since this amendment would take effect from the date of notification published in this regard, it will have prospective application hence it will not affect investment already made, but it will impact the transfer of such investment or beneficial interest therein to investors of such countries;
    3. Since the amendment specifies a carve out, it is understood that even additional investment by an existing investor from such countries in existing investee company may be subject to Government approval;
    4. This amendment to the FDI Policy 2017 may impact the contractual rights and obligations under the existing investment made if the circumstances warrant so.
Our Comments
It is stated in the Press Note that the review of FDI Policy is for curbing the opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic, which has resulted in pressure on the profitability of India Companies that will directly affect their valuations. Hence, this amendment is a move in that direction being a sovereign right of Government to prescribe investment conditions. However, this may require further clarification, such as the meaning of ‘beneficial owner’, and in the absence of a definition, it will be subject to increased KYC scrutiny. Although this amendment makes more sense in the case of listed companies, the existing companies owned 100% by investors from such countries or private companies may not pose any investment threat. However, it seems that they will also be subject to the revised policy framework. It remains to be seen if any suitable relaxations or carve out would be given, or the Government necessarily considers each investment proposal from such countries on a case to case basis. 
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