Top 5 FAQs on Impact of amendments in Foreign Direct Investment (FDI) Policy | Bhavya Sharma & Associates

In the wake of the economic and financial crisis caused by the COVID-19 pandemic, The Government of India has been issuing numerous advisories, notifications and relaxations to enable the Companies to face the hardships caused by the spread of COVID-19 and equip them to better handle the situation. In addition to the existing amendments, India has revised its Foreign Direct Investment (FDI) policy imposing stricter norms on foreign investments in Indian companies from an investor based out of bordering countries.

In order to understand it in a detailed manner you can refer to the below-mentioned FAQs:

Question1. What is Foreign Direct Investment (FDI)?

Answer: As per the Foreign Exchange Management (Non-debt Instruments) Rules, 2019  (“Non-Debt Instrument Rules”) which were notified by Ministry of Finance in supersession of Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (“RBI FDI Regulations”), FDI means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

Notes: 

a) While in case of unlisted entities, any investment by a non-resident will be treated as FDI but in case of listed entities, only investment beyond 10% on a fully diluted basis, shall be treated as such.

b) In case an existing investment by a person resident outside India in equity instruments of a listed Indian company falls to a level below ten per cent, of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI.

Question2.  What is the existing provision?

Answer: As per the current FDI norms, a person resident outside India is eligible to subscribe, purchase or sell equity instruments of an India company under the following routes:

A) Automatic Route: Under this route, Indian company engaged in specified business activities can take investment from a non-resident investor without the approval of Reserve Bank of India or the Central Government;

B) Government Route: Entry through this route requires prior Government approval and foreign investment received under this route shall be in accordance with the conditions stipulated by the Government in its approval;

C) Hybrid Route: Under this route, investment by non-residents up to a certain specified percentage of the capital of an Indian company is allowed without any approval and thereafter with requisite approval.

Notes: 

a) A person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan cannot purchase equity instruments without the prior government approval.

b) A citizen of Pakistan or an entity incorporated in Pakistan cannot invest in defence, space, atomic energy and sectors or activities prohibited for foreign investment even through the government route.

Question 3. What are the new amendments in the FDI Policy?

Answer: The amendments are contained in Press Note No. 3 (2020 Series) dated April 17, 2020, issued by the Department for Promotion of Industry and Internal Trade, Government of India, and will become effective from the date on which the principal foreign exchange regulations are amended.

Pursuant to the amendment:

a) All investments by entities incorporated in a "country which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country" will require prior regulatory approval;

b) In the event of any transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of paragraph 1 above, such change in beneficial ownership will also require prior regulatory approval.

Question 4. Whether the changes are effective now?

Answer: Press Note 3 mentions that the changes will come into effect from the date of FEMA notification. Accordingly, the Government has notified Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 vide notification dated April 22, 2020, which amends the Non-Debt Instrument Rules to provide for the changes in FDI regime as proposed by the Press Note 3 issued by Department for Promotion of Industry and Internal Trade (DPIIT). So, prior to 22nd April 2020, any FDI by citizens of or entities incorporated in countries sharing land borders with India except Pakistan and Bangladesh, in sectors under automatic route was allowed without any Government approval.

Question 5. What would be the impact of the new FDI laws on existing investments?

Answer: The changes proposed by the Press Note 3 once notified, will have the following implications in case of investment obligations/proposals involving a citizen of, or an entity incorporated in or the beneficial owner of an investment into India by a citizen of, any neighbouring country which shares a land border with India.

1. Impact on already executed Agreements: All investment obligations arising out of existing agreements will require prior approval of the Government of India.

2. Conversion of Securities: Conversion of existing instruments like Compulsorily Convertible Preference Shares or Compulsorily Convertible Debentures, into equity shares will not require any approval since the right to equity shares was created at the time of issuance of the convertible security.

3. ESOP: The existing ESOP’s held by a citizen of any neighbouring country which shares a land border with India, can be exercised by such persons since as per the Non-Debt Instrument Rules, in case of ESOP being issued in the sector, which require Government approval, such approval must be obtained before the issuance of ESOP. Considering the same, the exercise of such ESOP will not require any Government approval.

Further, the issue of any fresh ESOP’s to citizens of neighbouring countries will require prior Government approval.

4. Ongoing Private Placement or Rights Issue: Ongoing fund-raising exercise like private placement or rights issue, where application money has already been received, will not be impacted with the new FDI amendments.

Conclusion: Economists and market observers have said that the Government of India is now officially in a protectionist mode. With the new amendment, FDI in the above-mentioned cases would require prior approval from the Government of India, which would mean that the government would be able to monitor the extent of these investments and give its approval on a case to case basis. The government has amended the FDI policy to curb “opportunistic takeovers/acquisitions” of Indian Companies on account of COVID-19 Pandemic whereas it is also to be seen whether restrictions imposed by the Government of India are a temporary measure or a permanent policy decision.

Article By: Ms Bhavya Sharma, a Practising Company Secretary. You can contact us at Legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com

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