In light of the geopolitical situation of India with its neighbouring countries and in order to avoid opportunistic acquisitions in the time of the COVID-19 pandemic, the Indian government enacted various amendments to its existing investment laws. This article enumerates and examines the various provisions of Indian investment laws that has been amended or revised in this regard.
These amendments and revisions are as follows:
- Foreign Direct Investment Policy of the Government of India (“FDI Policy“) – Press Note 3 of 2020.
The Government of India (“Government“) on 17th April 2020 revised the then FDI Policy vide Press Note 3 of 2020 (“PN 3”) to provide that
(a) 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 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, can invest only under the government route.
The government route requires that prior approval of the Government should be procured for the investment.
- Foreign Exchange Management (Non-debt Instruments) Amendment Rules 2020 (“NDI Amendment Rules“).
The Indian Ministry of Finance issued the NDI Amendment Rules on 22nd April 2020 which amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 to provide for as follows:
- That an entity of a country, which shares a land border with India or the beneficial owner of an investment into India who is situated in or is a citizen of such country shall invest in an Indian company only with the Government approval;
- That a citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the Government route, in sectors or activities other than defence, space, atomic energy and such other sectors or activities prohibited for foreign investment.
- Also, that in the event of 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 or purview of the aforesaid provisos set out in (i) and (ii) above, such subsequent change in beneficial ownership shall also require government approval.
- Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules 2020 (“NDI Fourth Amendment Rules“).
The Indian Ministry of Finance issued the NDI Fourth Amendment Rules on 8th December 2020 which amended the NDI Amendment Rules to provide that of such investment was made by a Multilateral Bank or Fund, of which India is a member, the aforesaid regime of requiring prior approval of the Government would not be applicable to such investments.
The Indian Ministry of Corporate Affairs (“MCA“) has also been making numerous amendments to various rules to ensure that prior approval of the Government of India is procured in cases of investment by companies or nationals from countries which share a land border with India. These include amendments to the following rules:
- Companies (Incorporation) Second Amendment Rules, 2022
The MCA on 20th May 2022, amended the format in the incorporation of Indian companies to provide that in the event the Indian company is being incorporated by an entity or citizen of a country which shares a land border with India, the prior approval of the Government is enclosed with the incorporation form.
- Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2022
The MCA on 5th May 2022, amended the rules pertaining to the issuance of securities to provide that no offer or invitation for the subscription of securities shall be made by an Indian company to any company or national from a country which shares a land border with Indian unless the prior approval of the Government has been obtained for such issuance of securities to such national or company.
- Companies (Share Capital and Debentures) Amendment Rules, 2022
The MCA on 4th May 2022 amended the rules pertaining to the format for transfer of shares to provide for a declaration reflecting the obtaining of the prior approval of the Government in case the transferee of the shares of an Indian company is a company or national from a country that has a land border with India.
- Companies (Appointment and Qualification of Directors) Amendment Rules, 2022
The MCA on 1st June 2022, amended the rules pertaining to the appointment of directors of Indian companies. The amendment requires that any person who is seeking to be appointed as a director of an Indian company, who is a national of any country which shares a land border with India, will have to obtain security clearance from the Ministry of Home Affairs of the Government of India prior to such appointment. Such security clearance will have to be attached along with the application for director identification number (or “DIN” which is required for every director of an Indian company).
Conclusion
The foresight and proactiveness of the Government of India in keeping opportunistic acquisitions and investments in check must be truly appreciated. The thoroughness with which various laws and rules have been amended to ensure there is no slip in the cracks of any regulation is also very impressive.
In this article, Mini Raman examines the various provisions of investment laws that have been notified by the Government of India and various ministries to regulate the investment into Indian companies by entities or persons from countries sharing a land border with India.