Review of Foreign Direct Investment (FDI) Policy for Curbing of opportunistic takeovers/ acquisitions of Indian companies due to the current COVID-19 pandemic
The Government of India has announced the following major policy decisions vide Press Note 3 dated, April 17, 2020:
(i) Any non-resident of a country which shares its land borders with India can invest in India only under the Government route i.e. only with the prior approval of Government of India. This also includes investments whose beneficial owner is situated in or is a citizen of such country which shares its land borders with India. This will cover both direct as well as indirect investments.
(ii) The transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, which results in ownership (immediate or beneficial) being transferred to non-residents who are situated in or are citizens of the above countries would also require prior Government approval.
* Countries sharing land borders with India are Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan and Afghanistan.
Our Comments:
1. No minimum limit has been provided under the Press Note and even minority investments from such countries (including share transfers) would require prior government approval.
Further, the term “beneficial owner” has not been defined in the Press Note. Therefore, one has to consider the immediate as well as the ultimate beneficial ownership of investors proposing to invest in Indian entities.
Basis the above, in a scenario where the beneficial owner is from a country covered in the Press Note, albeit with a minority interest (as low as 1%), it would be advisable to act with caution before any investment decisions are taken and obtain government approval/clarification.
2. Further, there is no specific mention in the Press Note regarding existing share transfers inter-se between two non-residents resulting in a change of shareholding (as low as even 1%) in favour of another non-resident which is held as a beneficial owner from a country covered in the Press Note. In such a case also, it would be advisable to obtain prior government approval/clarification.
3. Though the purpose is mentioned in the Press Note to prevent takeover/ acquisitions such purpose does not form part of the subject matter of Press Note and thus may not be necessary to be looked into in any transaction of investment.
4. Consequential changes in KYC norms (inter alia including details of beneficial ownership) as well as changes to the reporting forms etc. can be expected. It would become necessary to get the details in KYC of all beneficial owners of any proposed FDI both direct as well as indirect through investment/ transfer in order to ensure compliance with this Press Note in future.
5. The Press Note specifies that the policy would take effect from the date of FEMA notification in the official gazette, i.e. April 22, 2020.
Notification of Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules, 2020
The Ministry of Finance, Government of India has notified Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules,2020 on April 27,2020 (‘Amended Rules’), thereby amending certain provisions of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘Rules’).
The key amendments are as follows:
1. Pricing guidelines for acquisition of rights shares by a non-resident
In terms of the Amended Rules, acquisition of equity instruments by a non-resident pursuant to acquisition of a right from a resident who has renounced such right shall be subject to the following pricing guidelines:
a) In case of a listed Indian company: At a price not lower than the price worked out in accordance with the Securities and Exchange Board of India guidelines
b) In case of an unlisted Indian company: At a price not lower than the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker registered with the Securities and Exchange Board of India or a practising Cost Accountant
Prior to the amendment, such acquisition of right shares was subject to the following pricing guidelines:
a) In case of a listed Indian company: At a price determined by the company
b) In case of an unlisted Indian company: At a price not lower than the price offered to persons resident in India
2. Time limit for relaxation of domestic sourcing norms for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting-edge' technology
In terms of the Rules, the requirement of 30% domestic sourcing is not applicable up to three years from commencement of the business for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible. Thereafter, sourcing norms are applicable.
It has now been notified by way of the Amended Rules that “commencement of the business” shall be defined as opening of the first store or start of online retail, whichever is earlier. Prior to the amendment, “commencement of the business” was defined as opening of the first store.
3. Investment by Foreign Portfolio Investors (‘FPIs’)
In terms of the Rules, FPIs which have invested in breach of the prescribed portfolio limits, have the option of divesting their holdings within five trading days from the date of settlement of the trades causing the breach. In case the FPI chooses not to divest, then the entire investment in the company by such FPI and its investor group is considered as investment under Foreign Direct Investment (‘FDI’) and the FPI and its investor group is restricted from making any further portfolio investment in the company concerned. The FPI, through its designated custodian, is required to bring the same to the notice of the depositories as well as the concerned company for effecting necessary changes in their records, within seven trading days from the date of settlement of the trades causing the breach.
It has now been additionally notified by way of the Amended Rules that the divestment of holdings by the FPI and the reclassification of FPI investment as FDI shall be subject to further conditions, if any, specified by Securities and Exchange Board of India and the Reserve Bank in this regard.
4. FDI in Insurance Intermediaries
In terms of the Amended Rules, FDI in insurance intermediaries has been increased from 49% to 100% under the automatic route. Insurance intermediaries have been defined to include insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, Surveyors and Loss Assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority of India from time to time. The Amended Rules have made effective the changes proposed vide Press Note 1 (2020 Series) dated February 21, 2020
