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Here's Why India Had To Watertight FDI From Bordering Countries The restrictions notably include investments from China. The immediate cause for bringing this amendment is to curb opportunistic takeovers or acquisitions of Indian companies during to the current COVID-19 pandemic.

By Shilpa Gupta

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Recently, the government of India made a significant change to its extant foreign direct investment (FDI) policy mandating the requirement of a government approval for all the investments irrespective of sector/activities from the countries which share land borders with India. The restrictions notably include investments from China. The immediate cause for bringing this amendment is to curb opportunistic takeovers or acquisitions of Indian companies during to the current COVID-19 pandemic.

It is noteworthy that global transactions (with India leg) and indirect transfers without any prescribed threshold falls under the purview of these guidelines. Therefore, such approval will be triggered in case the investor is an entity in the bordering country or the beneficial owner is in or is a citizen of any such country or the transfer of ownership of an existing or future FDI in an Indian entity either directly or indirectly which would result in the beneficial ownership of the said investment falling within the restrictions prescribed above.

The effective date of this policy change will be the date of notification under the Foreign Exchange Management Act (FEMA) which is yet to be issued. The notification will further bring clarity upon the definition of the term "beneficial owner' which is especially relevant in case of investments made by private equity investors that may have raised money from Chinese limited partners and provide operational guidance of the policy including reporting requirements where investments are made under automatic route. A closer analysis of all such structures or transactions needs to be done considering this new development wherein an Indian entity is also involved to evaluate if any approval from the Indian government is required.

There may be some situations wherein the proposed policy may apply and require government approval, irrespective of sector or quantum. Additional funding by investors of bordering countries in existing ventures; issue of shares under rights issue/bonus shares; conversion of convertible preference shares, debentures, FCCBs, exercising call/put options; honouring commitments of maintaining existing shareholding percentage; downstream investments by Indian entities having investments from border countries; invoking pledges; non-resident to non-resident transfer of shares of Indian companies, to name a few.

Shedding light on the approval process, the timelines may range from six-seven months in the normal course. The process can be initiated by applying online to the department for promotion of industries and internal trade (DPIIT). DPIIT shall refer a copy of the application to the concerned administrative industry for processing or process the application itself if the matter does not fall under prescribed ministries. A copy of the application would be sent to the ministry of home affairs (MHA) which shall undertake a detailed security check on the investor from bordering country which would be most time consuming.

The government aims to step up the scrutiny of these investments and any failure in obtaining the said approval will be viewed as non-compliance under the provisions of FEMA which may attract monetary penalties up to three times the amount of foreign investment involved. Alternatively, the Indian investee entity can undergo a process of compounding with the Reserve Bank of India to bless the past non-compliance with a relatively lower penalty. In either case, the company is required to take prior government approval or unwind the transaction.

In the backdrop of ensuring the protection of its strategic sectors amidst the global turmoil, Indian government has decided to take the afore-mentioned stringent measures.

Shilpa Gupta

Public Policy Expert

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