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Coronavirus: India Curbs Opportunistic Takeovers from Neighbouring Countries

Note: The content herein is only for informational purpose and does not constitute any legal opinion or advice on behalf of Legal Minds LLP. The information is based on the recently notified Press Note 3.

Amidst the battle against the COVID-19 Pandemic, the Indian Government revisited its Foreign Direct Investment (FDI) Policy. The Department for Promotion of Industry and Internal Trade has issued Press Note 3 to curb opportunistic takeovers/acquisitions of Indian Companies.

In brief, the revised FDI Policy mandates the prior permission of the Government for any foreign investment in or acquisition of an Indian Company (directly or indirectly) if the acquirer or beneficial owner of such an investment is based out of a country which shares land-borders with India.

Insight. Accordingly, any investment being made by Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan and Afghanistan (Neighbouring Countries) or if the beneficial owner of investment into India is based out of the countries mentioned above, then the investment shall require the prior permission of the Government of India. However, the revised FDI Policy fails to specify if investments routed from Hong Kong shall require the prior approval of the Government.

The revised FDI Policy only regulates foreign investment into India or the transfer of an existing Indian investment to a beneficial owner based out of a country neighbouring India.

Further, the revised Policy applies only to Foreign Direct Investments (FDI) and may not apply to Foreign Portfolio Investments (FPI).

The Securities and Exchange Board of India (SEBI) has mandated custodian banks to disclose details of the ultimate beneficial owners of foreign portfolio investors based out of China and Hong Kong. However, it is uncertain if a similar mandate would be introduced to the Foreign Portfolio Investment (FPI) regime.

Decoding the Impact of the Amendment.

In the absence of more definite particulars, the revised FDI Policy may raise concerns on the following fronts.

  1. Committed Deals. The impact of the revised FDI Policy on committed deals is unascertainable. Amongst other things, the Policy does not specify if arrangements determined before the proliferation of COVID-19 but not concluded will need Government approval. Further, the Policy fails to capture the manifestation of downstream investments by a Neighbouring Country Parent Company into its Indian subsidiary.

  2. Beneficial Owner. The revised FDI Policy fails to define the term ‘Beneficial Owner”. ‘Beneficial Owner’ is defined under (i) The Companies (Significant Beneficial Owners) Rules 2018 wherein the threshold for determining beneficial ownership is 10% and (ii) The Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 wherein the threshold for determining beneficial ownership is 25%.

The modality for determination of ‘Beneficial Owner’ is uncertain as yet. The Policy must define the term ‘Beneficial Ownership’.

  1. Overseas Funds. Overseas Investment Funds comprise a pool of diverse investors, including investors from Neighbouring Countries. The revised FDI Policy may impact the investments made by such foreign investment funds.

  2. Existing Investments. As a general business practise, amongst other things, government-approved foreign investments permit further investment in the investee company without any subsequent approval requirement subject to a continuance of the shareholding percentage of the investor at the time of original investment. Therefore, such a revised FDI Policy may impact the further infusion of rescue funding.

  3. Comprehensive Review. The mandate of prior approval appears to be exhaustive. The revised FDI Policy may have adopted a balanced approach and distinguished between (i) majority/acquisition of control investments and (ii) passive investments. Further, the revised FDI Policy does not mention if the revision is an interim measure or a permanent measure.

  4. Operational Procedure. The revised FDI Policy does not provide for critical factors such as the operating procedures, approval process, evaluation parameters and the timelines involved in processing such an investment.

Conclusion. The revised FDI Policy is a bold measure implemented by the Government. However, the implementation of the action ought to factor in the plight of businesses, investors or funds that may have received substantial portions of their investment from Neighbouring Countries. Further, the revised FDI Policy entails an exhaustive investment-related due diligence exercise to avoid the routing of funds from non-concerning countries.