COVID-19 Update – Changes in FDI Regime to Curb Opportunistic Takeovers from Neighbouring Countries

The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry has issued Press Note 3 (2020 Series) for review of Foreign Direct Investment (‘FDI’) Policy, dated April 17, 2020 (‘Press Note’) with the intent of curbing opportunistic takeovers/acquisitions of Indian companies in the current environment amidst the COVID-19 pandemic.

The key changes brought about by the Press Note are as follows:

•     Investment Restriction: Under the existing foreign exchange laws, any investment into India by a citizen of Bangladesh or an entity incorporated in Bangladesh was subject to receipt of Government approval. Further, any investment into India by a citizen of Pakistan or an entity incorporated in Pakistan was subject to prior Government approval, and additionally any such investment from Pakistan was prohibited in sectors/activities such as defence, space, atomic energy and other sectors/activities generally prohibited for foreign investment.

The Press Note seeks to expand the scope of the aforesaid restrictions and states that any foreign investment by or from an entity of any country which shares its land border with India (‘Neighbouring Country’) or where the beneficial owner of an investment into India is situated in, or is a citizen of, any Neighbouring Country, can only be made with prior approval of the Government. Accordingly, investments from countries like China, Nepal, Myanmar, Bhutan and Afghanistan would also now be subject to the approval of the Government.

•      Transfer Restriction: The Press Note also states that any transfer (whether direct or indirect) of any current or future FDI in any Indian entity, which results in the beneficial ownership being transferred to any such person of a Neighbouring Country, would also be subject to the approval of the Government.

The Press Note does not currently specify if such restrictions are only temporary in nature until the COVID – 19 pandemic situation is resolved.

The Press Note seeks to amend the Consolidated Foreign Direct Investment Policy dated August 28, 2017 (‘FDI Policy’) and will be effective from the date of notification of the corresponding amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.