Jan 28, 2021

Foreign Investment Review 2021

This Practice Guide – Foreign Investment Review provides a detailed overview of the existing and developing legal framework, government policies and practices relating to the oversight and review of foreign investment in India, the key legislation being the Foreign Exchange Management Act,  1999 (“FEMA”). It also describes, inter alia, the prohibited sectors and the available routes applicable for foreign investment into India, along with sector-specific considerations and key existing trends.

1.1. Policies and practices

1.1.1. What, in general terms, are Indian government policies and practices regarding oversight and review of foreign investment?

Primarily, since 1991, India has sought to liberalise its economy and has continuously opened up most of its industrial and business sectors to foreign investment. In particular, the Indian government has sought to attract foreign investment into the country by undertaking steps towards enhancing the ease of doing business in India, as it has the effect of establishing long-term economic relationships with India. Foreign investment in India is principally governed by the Foreign Exchange Management Act 1999 (FEMA) and the regulations framed thereunder, which consolidate the law relating to foreign exchange in India. To regulate foreign investment, the Reserve Bank of India (RBI) had published the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000 and thereafter the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations 2017 (TISPRO 2017) (as amended from time to time), under the FEMA was published on 7 November 2017. Additionally, in 2010, the Department for Promotion of Industry and Internal Trade (DPIIT) (earlier known as the Department of Industrial Policy and Promotion) had put in place a policy framework that consolidated the sectoral requirements and other conditions that must be complied with by foreign investors investing in Indian entities (FDI Policy). The FDI Policy used to be updated every year and amended from time to time and the consolidated foreign direct investment (FDI) policy of 2017 is the last policy framework issued by the DPIIT (Consolidated FDI Policy). On 15 October 2019, the central government notified, inter alia, certain amendments to the FEMA, pursuant to which the central government, rather than the RBI, has been granted the power of specifying all permissible non-debt instruments capital account transactions and the RBI has been granted the power of specifying all debt instruments capital account transactions. The central government separately, on 16 October 2019, also notified the following instruments that shall be considered as ‘non-debt instruments’, inter alia, namely: all investments in equity in incorporated entities (public, private, listed and unlisted); capital participation in limited liability partnerships (LLPs); all instruments of investment as recognised in the FDI Policy as notified from time to time; investment in units of alternative investment funds and real estate investment trusts and infrastructure investment trusts; and investment in units of mutual funds and exchange-traded funds that invest more than 50 per cent in equity. Pursuant to these amendments to the FEMA, the central government, on 17 October 2019, notified the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (Rules 2019) and the RBI notified the Foreign Exchange Management (Debt Instruments) Regulations 2019 (Regulations 2019) and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019, that have superseded the TISPRO 2017 (as amended from time to time) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations 2018. In the past year, the trend for liberalisation has continued, with relevant changes being made to the Indian foreign exchange laws in this regard, for example: the central government, in Press Note 4 dated 17 September 2020, increased the FDI cap to 74 per cent from 49 per cent through the automatic route in the defence sector. Further, the Rules 2019 contain sectoral requirements that must be complied with by foreign investors for the purposes of investing in particular sectors in India and also by Indian companies that receive foreign investments in India. They also classify sectors that fall under the approval route and those that fall under the automatic route. Further, there are also certain limited sectors and industries in which foreign investment is prohibited. Except for those sectors and subject to conditions for foreign investment (performance conditions) or government approval in certain sectors, by and large, there are no preconditions for making foreign investment into other sectors in India. Additionally, the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2019 (FPI Regulations), read with Schedule II of Rules 2019, permits foreign portfolio investors (FPIs) to invest in equity instruments of an Indian company and specifies the form and manner in which such investment by FPIs in Indian entities can be categorised as foreign portfolio investment or foreign direct investment (FDI). As per the Rules 2019, the total holding by each FPI is required to be less than 10 per cent of the total paid-up equity capital on a fully diluted basis or less than 10 per cent of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (individual limit); and the total investment of all the FPIs put together in an Indian company (including any other direct or indirect foreign investments) is required to not exceed 24 per cent of the paid-up equity share capital on a fully diluted basis or the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (aggregate limit). Further, as per the FPI Regulations, if the investment by an FPI exceeds the individual limit of 10 per cent, this investment will qualify as FDI. Further, the Regulations 2019, read with the FPI Regulations, also permit FPIs to invest in any debt securities, shares, debentures and warrants of listed companies or companies whose securities are likely to be listed on a stock exchange in India. Therefore, foreign investment in India can broadly be classified into investments in debt instruments and investments in non-debt instruments.

1.2. Main laws

1.2.1. What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

The key legislation that directly or indirectly regulates and governs acquisitions and investments by foreign nationals is the FEMA (along with rules and regulations thereunder, in particular, the Rules 2019 and Regulations 2019), as well as other notifications, circulars and directions pertaining to foreign investments issued by the central government and RBI from time to time. Until 2010, the regulatory framework for foreign investment in India consisted of the FEMA; the regulations framed thereunder, the press notes and press releases issued by the DPllT, and the notifications, circulars and directions issued by the RBI. After April 2010, the press notes and press releases issued by the DPllT were consolidated into the FDI Policy; however, the DPIIT continues to issue press notes and press releases each year, and the changes proposed in these press notes and press releases come into effect after being incorporated in the relevant regulations framed under FEMA. Recently, the DPIIT issued Press Note 3 of 2020 dated 17 April 2020 according to which any entity of a country sharing a 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. This was primarily done to stem any attempts by Chinese firms to take control of Indian firms that have been affected by covid-19 related lockdowns. In addition to complying with the Indian foreign exchange laws, rules, regulations and policies, foreign investors are also required to comply with the relevant sector-specific and state-specific (local laws) legislation applicable to a particular industry or sector.

1.3. Scope of application

1.3.1. Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

Under the present laws, except for a few sectors, for example, lottery, gambling and betting, chit funds, Nidhi companies and trading in transferable development rights, where foreign investment is prohibited, foreign investment is allowed in almost all sectors either under the automatic route or under the approval route. There is a percentage threshold prescribed for foreign investment in some sectors (such as petroleum refining by public sector undertakings, terrestrial broadcasting FM, uplinking of news and current affairs TV channels, print media, scheduled air transport service and regional air transport service, private security agencies, multi-brand retail trading, banking, and infrastructure companies in securities markets) and, except for some prohibited sectors, foreign investment overall is allowed in almost all sectors under the automatic route up to 100 per cent of the equity shareholding, although, in some cases, with certain performance conditions, such as minimum capitalisation norms and exit conditions, among others. India has consistently liberalised and eased the norms for foreign investments in India. For foreign investment in any automatic route sector, there is no need for prior approval and only certain post facto filings are required. There have been significant liberalisation and simplification efforts made in recent years through amendments in the FEMA and regulations framed thereunder; for example, important filings such as Form FC-TRS (reporting of transfer of shares between residents and non-residents) and Form FC-GPR (reporting of issuance of shares by an Indian investee company) have been made available online and subsumed into a single master form (SMF) for reporting the total investment in an Indian company. The online filing of an SMF can be done through a designated website portal from 1 September 2018. The SMF facility provides for an online reporting platform to Indian companies with investments from people resident outside India including in an investment vehicle. Subsequently, pursuant to the Rules 2019, it is required that any Indian entity or investment vehicle making downstream investment in another Indian entity shall be considered as indirect foreign investment and shall, in accordance with the Reporting Regulations, 2019, be required to file Form DI with the RBI within 30 days of the date of allotment of the equity instruments. Furthermore, a person or entity who has delayed the filing of the SMF can regularise that by paying a late submission fee, subject to the delay being condoned by the RBI. However, in sectors where foreign investments are permitted with the prior approval of the sector-specific competent authority (eg, the Ministry of Information and Broadcasting in relation to foreign investment in the broadcasting sector; and the Department of Industrial Policy and Promotion in relation to foreign investment in the single and multi-brand retail trading sectors) (competent authority), the government reserves the right to oversee, control, permit or prohibit investments, and mainly these sectors are considered sensitive (such as print media and multi-brand retail trading). In terms of competition law, all forms of (domestic and international) acquisitions, mergers or amalgamations that exceed the jurisdictional thresholds and do not benefit from any exemption must be notified to, and obtain the approval of, the Competition Commission of India (CCI) before the transaction can be consummated. Joint ventures are not specifically dealt with under the Competition Act 2002 (the Competition Act) from a merger control perspective. However, to the extent that setting up a greenfield joint venture or the entry of a new partner in a brownfield joint venture involves the acquisition of shares, voting rights or assets, their notifiability is examined as acquisitions and must be notified to the CCI where the jurisdictional thresholds are met. Further, the Competition Act does not specifically regulate any industry in relation to merger control. However, certain sector-specific exemptions are available. With respect to minority acquisitions, an acquisition of shares or voting rights, solely as an investment or in the ordinary course of business, of less than 25 per cent of the total shares or voting rights of an enterprise, is exempt from the requirement to file a pre-merger notification with the CCI, provided there is no acquisition of ‘control’ as a result. Under the Competition Act, ‘control’ is defined to include ‘controlling the affairs or management by (i) one or more enterprises, either jointly or singly, over another enterprise or group, (ii) one or more groups, either jointly or singly, over another group or enterprise’. While there is no ‘bright line’ test prescribed by the Competition Act or the CCI to define control, based on the CCI’s decisional practice, control includes de facto and de jure control as well as ‘material influence’. Further, minority acquisitions of less than 10 per cent are deemed to be made, ‘solely as an investment’ where the acquirer:

  • is entitled to only such rights as are exercisable by ordinary shareholders of the target enterprise;
  • is not a board member on the target nor has the right or intention to appoint a board member or to nominate one; and
  • does not intend to participate in the management or affairs of the target.

 

1.4. Definitions

1.4.1. How is a foreign investor or foreign investment defined in the applicable law?

The term ‘foreign investment’ is defined under the Rules 2019 to mean: ‘any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of a LLP’. Furthermore, a person resident outside India is permitted to hold foreign investment as either FDI or FPI in a particular Indian company. The Rules 2019 do not define the term ‘foreign investor’. However, they provide the entry routes, eligible instruments and mechanism whereby a person resident outside India can undertake foreign investment in India. The term ‘person resident outside India’ as per FEMA section 2(w) means a person who is not resident in India. Essentially, Indian foreign exchange law allows any set-up that is an association of persons, foundations, trusts, bodies corporate, companies or entities to make FDI in India.

1.5. Special rules for SOEs and SWFs

1.5.1. Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

While the Rules 2019 do not define SOEs or SWFs, the term has been referred to in the FPI Regulations, wherein a sovereign wealth fund is construed as a category I FPI (Regulation 5(a)(i), FPI Regulations). Therefore, the total holding of an SWF in an Indian company must be less than 10 per cent of the total paid-up equity capital on a fully diluted basis or less than 10 per cent of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (individual limit), exceeding which, this investment will be regarded as FDI. Further, the total investment for all the FPIs put together in an Indian company (including any other direct or indirect foreign investments) must not exceed 24 per cent of the paid-up equity share capital on a fully diluted basis or the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (aggregate limit). Additionally, with effect from 1 April 2020, the applicable aggregate limit for an SWF (and any other FPI) is the sectoral cap or statutory ceiling as prescribed in the Schedule I of Rules 2019. However, an Indian investee company is permitted to decrease this aggregate limit to a lower threshold limit of 24 per cent, 49 per cent or 74 per cent as deemed appropriate, by passing a resolution at the meeting of its board of directors followed by a special resolution at the shareholders’ meeting, before 31 March 2020. Further, such an Indian investee company that has decreased its aggregate limit to 24 per cent, 49 per cent or 74 per cent, is permitted to increase it, once, up to 49 per cent or 74 per cent or the statutorily prescribed sectoral cap as under Schedule 1 of Rules 2019, by passing a resolution at the meeting of its board of directors followed by a special resolution at the shareholders’ meeting, after which this Indian investee company cannot reduce it to a lower threshold.

1.6. Relevant authorities

1.6.1. Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

Subject to satisfying the assets and turnover thresholds prescribed under the Competition Act, the regulations and notifications thereunder, and the non-applicability of any of the exemptions available to the transacting parties, investments that involve an acquisition of shares, assets, voting rights or control, or a merger or amalgamation (together referred to as ‘combinations’) must be notified to the CCI. The CCI is empowered to prohibit or modify transactions that are likely to cause an appreciable adverse effect on competition (AAEC) in India. Further, there are specific regulators that review mergers or acquisitions of companies within certain industries and sectors (eg, the Insurance Regulatory Development Authority for insurance companies and the Telecom Regulatory Authority of India for telecom companies). Previously, the Foreign Investment Promotion Board (FIPB) was the government body that offered a single-window clearance for proposals on FDI in India that are not allowed access through the automatic route. However, regarding OM No. 01/01/FC12017 FIPB dated 5 June 2017, the government of India has abolished the FIPB, and mandated that where FDI is only permitted through the approval route, the sector-specific competent authorities (such as the Ministry of Information and Broadcasting for activities in the broadcasting and print media sector; the Ministry of Mines for activities in the mining sector; the Department of Space for activities related to satellites; and the Department of Pharmaceuticals, the Ministry of Chemicals and Fertilizers for activities in the pharmaceuticals sector) must be approached for approval. However, in the case of doubt as to which competent authority is to be approached, the DPIIT is mandated to identify the competent authority concerned and to this effect, the DPIIT has established a Foreign Investment Facilitation Portal (FIFP).

1.6. Relevant authorities

1.6.2. Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

The competent authorities have the discretion to approve, reject or defer a proposal for foreign investment where such proposals have come via the approval route after having sought the concurrence of the DPIIT. Apart from the discretion of the competent authorities, the proposed investment would also have to be in line with sectoral laws and regulations and, where necessary, applications for approval from the sectoral regulators would have to be given. If any sector-specific approval is required from any other sector regulator, it must be obtained from the relevant regulatory authority. Again, these authorities reserve the discretion to reject any applications made to them without specifying the reasons. Further, the CCI’s discretion is limited to a qualitative assessment of whether the notified transaction causes or is likely to cause an AAEC within the relevant market in India. The CCI also has the power to direct modifications to the terms of a transaction, or even prohibit it, if it is of the view that this transaction is likely to cause an AAEC in India.

2.1. Jurisdictional thresholds

2.1.1. What Indian thresholds trigger a review or application of the law? Is filing mandatory?

Where the proposed foreign investment is to be made via the approval route, the jurisdiction of the competent authorities is triggered, as they have the authority to review the proposed applications. Foreign direct investment transactions of more than 50 billion rupees need the prior approval of the Cabinet Committee on Economic Affairs. Further, any investment or payment made into India must be reported to the Reserve Bank of India (RBI) either through authorised dealers or directly to the RBI, depending on the nature of investment or payment made into India. Under the Competition Act 2002 (the Competition Act), a combination will need to be mandatorily notified to the Competition Commission of India (CCI) if it satisfies any of the following assets and turnover thresholds, and is unable to take the benefit of any of the available exemptions:

India Assets Turnover
Either the acquirer or the target or both have 20 billion rupees or 60 billion rupees
The group to which the target will belong has 80 billion rupees or 240 billion rupees
Worldwide Assets Turnover
Either the acquirer or target or both have In the case of a merger, the enterprise after a merger or created as a result of the merger, has US$1 billion, including assets of at least 10 billion rupees in India or US$3 billion, including turnover in India of more than 30 billion rupees
A group has US$4 billion, including assets of at least 10 billion rupees in India or US$12 billion, including turnover in India of more than 30 billion rupees

 

2.2. National interest clearance

2.2.1. What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?

Foreign investments are permitted in India through the automatic route and the approval route depending on the sector. No prior approval is required for activities falling under the automatic route, subject to compliance with the applicable performance conditions. However, areas or activities that do not fall within the automatic route and are under the approval route require the prior approval of the competent authority. Further, foreign investment in some sectors, such as investment in greenfield in the pharmaceuticals sector, is permitted 100 per cent through the automatic route. However, investment in brownfield in the pharmaceuticals sector is permitted up to a 74 per cent  via the automatic route, and beyond this threshold via the approval route. To obtain approval, the investor company or investee company (the applicant) must submit a single online application on the website of the Foreign Investment Facilitation Portal (FIFP) along with such information as required, which, inter alia, includes:

  • a summary of the foreign investment proposed;
  • the certificate of incorporation and memorandum of articles of the investor and investee company (and in the case of a joint venture, of the joint venture company);
  • diagrammatical representations of the cash flow;
  • foreign inward remittance certificates evidencing the fund flows; and
  • a copy of the board resolution of the investee or issuing company in the case of a fresh issue of shares. Certain categories of foreign investors, such as investment funds, are required to provide additional documentation pertaining to the investment managers and contributors to these funds.

If the online application is not digitally signed, the Department for Promotion of Industry and Internal Trade (DPIIT) will direct the applicant to submit a physical copy of the application to the concerned competent authority within five days of this direction being given to the applicant. There is no fee for filing an online application. Further, all notifiable combinations must be notified to the CCI in the format prescribed under the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (the Combination Regulations). The Ministry of Corporate Affairs of the Indian government issued a notification on 29 June 2017 that does away with the erstwhile requirement to necessarily notify a combination within 30 calendar days of an event triggering a notification requirement. However, the requirement to file a notice with the CCI is still mandatory and the suspensory regime (ie, the requirement to receive CCI approval prior to consummating a notifiable transaction in any way or form) still applies. Subject to the extent of market shares in overlap markets, the transaction may be notified in the shorter form (Form I) or a more detailed form (Form II). Recently, the CCI, by way of a gazette notification dated 13 August 2019 (the 2019 Amendment), has amended the Combination Regulations and revised the scope of information that must be provided under Form I. Subsequent to filing the application, the CCI reviews the combination to ascertain if the combination causes or is likely to cause any appreciable adverse effect on competition (AAEC), before passing its final order. The 2019 Amendment also introduced a ‘green channel’ clearance option for transactions with no overlaps. Under the green channel, transactions between parties that are not engaged in identical or similar business, and are not vertically linked or engaged in complementary business activities will be ‘deemed’ approved on notification to the CCI. A Form I being filed under the green channel must be accompanied by a declaration that shows both:

  • the lack of overlap between transacting parties and their respective groups; and
  • the proposed transaction is not causing an AAEC.

Notably, if the CCI subsequently concludes that a transaction notified to it under the green channel did not, in fact, meet the requirements for such a filing or that the declaration by the notifying party or parties in this regard was incorrect, the notice and the ‘deemed approval’ will be void ab initio and the CCI shall deal with the combination ‘in accordance with the provisions of the Competition Act’. Before reaching a conclusion, the CCI must give parties an opportunity to be heard. 

2.2. National interest clearance

2.2.2. Which party is responsible for securing approval?

The approval of the competent authority is required if the investment is made under the approval route and either of the parties, being the foreign collaborator or foreign investor, or the Indian company, can secure approval from the competent authority. Further, where an investment involves an acquisition of shares, assets, voting rights or control, the acquirer will be responsible for notifying the combination to the CCI. In the case of a merger or amalgamation, all the parties are jointly responsible for notifying the combination to the CCI.

2.3. Review process

2.3.1. How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?

Within two days of submission of the online application, the DPIIT is required to e-transfer the application to the competent authority concerned and also circulate the application to the RBI, the Ministry of Home Affairs (MHA) (if the proposed foreign investment is in a sector requiring security clearance) and the Ministry of External Affairs. The concerned ministries are required to upload their queries regarding the application on the FIFP website within four weeks of online receipt of the application. If security clearance is required from the MHA, the aforesaid timeline can be extended to six weeks (Stage 1). Within one week of the completion of Stage 1, the competent authority may pose queries to the applicant. The applicant must respond to the queries of the competent authority within one week of the date of receipt of queries (Stage 2). Within two weeks from the completion of Stage 2, the competent authority must process the application and convey its decision to the applicant. The above timelines are subject to variation if the application is subject to receipt of security clearance from the MHA or because of other administrative reasons. The status of the application can be tracked on the FIFP website. As far as the CCI is concerned, the overall prescribed statutory time period to review the combination and pass a final order is 210 calendar days from the date of filing of the notification, and in limited situations, where remedies may be warranted, 270 days to disapprove or approve the transaction. The Combination Regulations further provide that the CCI shall endeavour to pass its final order within 180 calendar days of filing the notification. Further, the CCI must form a prima facie opinion on the likelihood of the combination resulting in an AAEC within 30 working days of filing the notification. This is subject to ‘clock stops’ on account of requests from the CCI for additional information, extensions sought by parties and such like. The extent of overlaps relating to the combination, the sensitivity of the government towards the sector to which the combination relates and the existence or likelihood of the combination resulting in an AAEC, are some of the factors that may determine the timeline for clearance. In a majority of cases, the CCI has approved transactions within the 30-working-day timeline (excluding clock stops). There are four broad categories of exemptions under the merger control regime that the parties to the combination can analyse and benefit from, namely:

  • Statutory exemption: the requirement of mandatory notification to the CCI prior to the closing of the transaction do not apply to any financing, acquisition or subscription of shares undertaken by FIIs, or venture capital funds registered with the Securities and Exchange Board of India, public financial institutions and banks pursuant to a covenant of an investment agreement or a loan agreement. However, these entities are required to provide details of the acquisition, including control, circumstances for exercising this control and consequences of default arising out of these loan agreements or investment agreements to the CCI within seven days of the date of closing.
  • Categories of transactions ‘normally’ exempt from mandatory notification: Regulation 4 read with Schedule 1 of the Combination Regulations treats certain categories of transactions as being ordinarily not likely to cause an appreciable adverse affect on competition in India, and hence provides that a pre-notification need not normally be filed for these transactions.
  • Target-based exemption (de minimis exemption): further to the thresholds notification, any transaction where the enterprise (ie, the enterprise whose shares, voting rights, assets or control are being acquired or are being merged or amalgamated) either has assets not exceeding 3.5 billion rupees in India or has a turnover not exceeding 10 billion rupees in India, is currently exempt from the mandatory pre-notification requirement.
  • Exemptions for specific sectors: on 10 August 2017, the government of India issued a notification (under section 45 of the Banking Regulation Act 1949) exempting certain regional rural banks (governed by the Regional Rural Banks Act 1976) from the merger control provisions for five years (that is, until 10 August 2022). On 30 August 2017, the exemption from the merger control provisions was also extended to all mergers and acquisitions involving nationalised banks, under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act 1980, for 10 years (that is, until 30 August 2027). On 22 November 2017, all mergers and acquisitions involving central public sector enterprises operating in the oil and gas sectors under the Petroleum Act 1934 have been exempted from the merger control provisions for five years (that is, until 22 November 2022).

There are no expedited or ‘fast-track’ options for the review process; however, occasionally the government of India considers proposals for the fast-track single-window clearance of foreign investment on a jurisdictional basis. With respect to the Competition Act, if a transaction is able to avail the green channel route (after satisfying all conditions for a green channel filing), then this transaction will be ‘deemed’ approved upon notification to the CCI. 

2.3. Review process

2.3.2. Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?

Where investment is through the approval route, prior approval must be obtained before the transaction is completed. If the parties complete the transaction before obtaining the relevant approvals or in a manner that contravenes the Foreign Exchange Management Act 1999 (FEMA) (or a rule, regulation, notification, direction or order is issued in exercise of the powers under the FEMA) or contravene any condition subject to which an authorisation is issued by the RBI, the parties shall, upon adjudication by the designated authorities of the Enforcement Directorate (Directorate), be liable to a penalty of up to three times the sum involved where this amount is quantifiable, or up to 200,000 rupees where the amount is not quantifiable. A penalty of 5,000 rupees will be incurred for every day after the first day on which the contravention continues. Further, under section 14 of the FEMA, in the event of non-payment of the penalty within 90 days from the date the notice for payment of this penalty is served, the parties shall be liable to civil imprisonment. Every notifiable combination requires the approval of the CCI prior to its consummation. If a notifiable combination is not notified, or if the parties take any step to implement the combination (or a part thereof) prior to the receipt of the CCI’s approval, the CCI may impose penalties extending up to 1 per cent of the total turnover or assets (whichever is higher) of the combination. In the past, the CCI has imposed penalties of up to 50 million rupees. To date, the CCI has not exercised its power to impose the highest allowable penalty under the Competition Act.

2.4. Involvement of authorities

2.4.1. Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?

Formal or informal guidance from authorities such as the competent authority or the DPIIT can be obtained prior to a filing being made or during the time that the application is in process. An applicant can submit a clarification to the DPIIT listing its query in the prescribed form. The CCI has also put in place a mechanism for pre-filing informal merger consultations, but it is not binding.

2.4. Involvement of authorities

2.4.2. When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?

Experts and specialists are involved at the stage when policy decisions are being made for the purposes of receiving recommendations. Lobbying does not formally prevail in India. There is no informal procedure or mechanism available to facilitate clearance of any proposal. The process of granting approval is transparent and is solely considered on the basis of the Foreign Exchange Management (Non-debt Instruments) Rules 2019. The applicant must meet all the legal requirements as prescribed for the approval to be granted. Applicants can track the status of their applications on the FIFP website on both a daily and a weekly basis. In the past, economists have been engaged by parties for certain complex merger control filings to the CCI.

2.4. Involvement of authorities

2.4.3. What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?

The DPIIT and the RBI may review, challenge and unwind an approved transaction. In Bycell Telecommunication India P Ltd v Union of India and Ors, the Foreign Investment Promotion Board, having previously granted approval to the petitioner, revoked it – after the Ministry of Home Affairs withdrew the security clearance of the petitioner – on the grounds that even if the petitioner had complied with requirements under the laws relating to foreign investment, lack of security clearance is a valid ground to revoke an application. Further, under the provisions of the FEMA, the central government, by an order published in the Official Gazette, may appoint as many officers of the central government as it likes as the adjudicating authorities for holding an inquiry into the person alleged to have committed contravention of the FEMA. The Directorate is a specialised financial investigation agency under the Department of Revenue, Ministry of Finance, which has, under the central government, been accorded powers and is mandated with the task of enforcing the provisions under the FEMA. The CCI may also review, challenge or unwind those combinations, where the transactions that met the assets or turnover thresholds prescribed under the Competition Act were not notified to the CCI, on account of the availability of any exemption or otherwise. This power of review exists for a period of one year post the closing of the transaction. However, this limitation period of one year is not applicable to proceedings initiated by the CCI for not filing an otherwise notifiable (ie, not exempt) combination.

3.1. Substantive test

3.1.1. What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?

The online application submitted on the Foreign Investment Facilitation Portal (FIFP) website is reviewed in totality by the relevant ministries, the Reserve Bank of India (RBI) and the concerned competent authority, and to impart greater transparency to the approval process, guidelines have been issued that govern the consideration of foreign direct investment proposals by the FIFP. The onus of compliance with the sectoral or statutory caps on foreign investment and attendant conditions, if any, shall be on the company receiving foreign investment. The substantive test for clearance adopted by the Competition Commission of India (CCI) is whether the combination causes or is likely to cause an appreciable adverse effect on competition (AAEC) within the relevant market in India. To conduct an AAEC assessment, the CCI considers a number of factors:

  • the actual and potential level of competition through imports in the market;
  • the extent of barriers to entry into the market;
  • the level of combination in the market;
  • the degree of countervailing power in the market;
  • the likelihood that the combination would result in parties to the combination being able to significantly and sustainably increase prices or profit margins;
  • the extent of effective competition likely to sustain in a market;
  • the extent to which substitutes are available or are likely to be available in the market;
  • the market share, in the relevant market, of the persons or enterprises in a combination, individually and as a combination;
  • the likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;
  • the nature and extent of vertical integration in the market;
  • the possibility of a failing business;
  • the nature and extent of innovation;
  • the relative advantage, by way of the contribution to the economic development, by any combination having or likely to have AAEC; and
  • whether the benefits of the combination outweigh the adverse impact of the combination, if any.

If the CCI forms a prima facie opinion that the combination has caused or is likely to cause an AAEC within the relevant market in India, the onus of demonstrating the absence of any AAEC is on the party or parties notifying the transaction. 

3.1. Substantive test

3.1.2. To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?

There is no obligation imposed by any statute or regulation on the authorities regulating or reviewing foreign investment to consult officials in other countries. The CCI has entered into cooperation arrangements with several overseas competition regulators including the European Commission, CADE (Brazil), the Federal Anti-Monopoly Service (Russia), the Federal Trade Commission and the Department of Justice (the United States), and the Ministry of Commerce (China). Cooperation with these foreign competition regulators, inter alia, extends to coordination to curb anticompetitive activities within their territories, which have an adverse effect on their respective relevant markets. To this end, the CCI can exchange information about parties that is not confidential, and does not harm the parties’ interest, after seeking prior approval from the parties concerned.

3.2. Other relevant parties

3.2.1. What other parties may become involved in the review process? What rights and standing do complainants have?

The review of an application process is an internal process of the government and the competent authority, or the Department for Promotion of Industry and Internal Trade may itself consult the relevant government departments while considering any application before it. No other party, including the applicant, is given a hearing as a matter of process. However, the competent authority can seek clarification or further information from the applicant while considering any application. The CCI has the discretion to reach out to third parties (competitors, customers, suppliers, experts, etc) during the initial 30-business-day period as well as after forming a prima facie opinion that the combination has caused or is likely to cause an AAEC. In instances where the CCI reaches out to third parties, the initial 30-business-day period may be extended by an additional 15 business days.

3.3. Prohibition and objections to transaction

3.3.1. What powers do the authorities have to prohibit or otherwise interfere with a transaction?

Pursuant to the provisions of section 37 of the Foreign Exchange Management Act 1999 (FEMA), the Enforcement Directorate (Directorate) has been mandated to enforce the investigative and punitive provisions of the FEMA. The Directorate has jurisdiction under the provisions of the FEMA as well as the Prevention of Money Laundering Act 2002, and draws its personnel from other investigative entities such as customs and central excise, income tax authorities and the police, among others, on deputation, as well as through direct recruitment of personnel. Further, under section 13 of the FEMA, the RBI can impose penalties if any person contravenes the provisions of the FEMA or rules and regulations made under it (section 13(1)) or in the case of a contravention of any condition subject to which an authorisation has been issued by the RBI (section 13(1)). Upon adjudication, the monetary penalty that can be imposed for the instances described above is three times the sum involved in the contravention, if this amount is quantifiable, or a penalty of up to 200,000 rupees if it is not quantifiable. Further, if the contravention is ongoing, an additional penalty can be imposed of up to 5,000 rupees for every day the contravention continues (section 13(1)). As indicated above, the CCI may modify or even prohibit a transaction if it determines that this transaction causes or is likely to cause an AAEC in the relevant market in India. To date, the CCI has not prohibited any transaction.

3.3. Prohibition and objections to transaction

3.3.2. Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?

There are no specific guidelines or rules pursuant to which a transaction can be remedied or an objection avoided by submitting undertakings. However, we have seen instances where the RBI has directed Indian companies to provide an undertaking and declarations from their chartered accountants with respect to the confirmation on the pricing of the shares being transacted or confirmation on the investment being in compliance with the Foreign Exchange Management (Non-debt Instruments) Rules 2019 and Foreign Exchange Management (Debt Instruments) Regulations 2019. The CCI can propose both structural and behavioural modifications where it believes that the combination has, or is likely to have, an AAEC, but can be eliminated through suitable modifications to the transaction. According to the amendments to the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 dated 9 October 2018, the parties can now offer remedies during the CCI’s 30-business-day review period. Once the CCI initiates its detailed investigation into the transaction, the parties can suggest amendments to the modification that can only be proposed by the CCI. If the CCI accepts the counterproposal, it approves the combination. However, if it does not accept the counterproposal, the parties are given time to accept the modifications proposed by the CCI.

3.4. Challenge and appeal

3.4.1. Can a negative decision be challenged or appealed?

 

3.5. Confidential information

3.5.1. What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?

The applicant can, in its online application submitted on the FIFP website, insist that the information submitted is confidential. The CCI treats any information as confidential if disclosure of it will result in disclosure of trade secrets or destruction or appreciable diminution of the commercial value of the information or can be reasonably expected to cause serious injury. An application to maintain confidentiality over information being submitted to the CCI is required to accompany a notification and all subsequent submissions. Confidentially is typically granted by the CCI for no more than three years.

4.1. Relevant recent case law

4.1.1. Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.

A notable transaction recently approved by the Competition Commission of India (CCI) was in the case of Schneider Electric India Pvt Ltd, MacRitchie Investments Pte Ltd and Larsen & Toubro (L&T). The transaction entailed an acquisition by Schneider of the electrical and automation business of L&T, and was approved pursuant to a Phase II (detailed) review by the CCI. The CCI observed that the 29 overlapping products that were produced by the parties were not used on a standalone basis and were complementary or supplementary to the other products used in a switchboard. Accordingly, one or more of these products could be grouped in one or more clusters based on their functionality or utility. The CCI noted that the transaction would have resulted in an increased concentration across 15 markets and provided the entity with dominance in various markets, given that Schneider and L&T were major close competitors. The parties were considered to be undisputed market leaders in two of the products, as the combined market share of the parties was in the range of 55 to 60 per cent. More importantly, the CCI noted that there was a strong consumer preference for the use of products belonging to the same brands across a low-voltage electrical panel. Accordingly, a large player, such as the combined entity providing a portfolio of products, was at an inherent advantage. To alleviate the likely anticompetitive effects arising out of the transaction, the CCI had recommended divestments; however, it approved the transaction based on the following alternative behavioural remedies that were proposed by the parties, without directing any divestments:

  • White labelling: the parties offered to strengthen existing low-voltage manufacturers (except Siemens and ABB, which were their biggest competitors) by offering them products under a white labelling arrangement for a period of five years from the date of closing of the proposed combination.
  • Transfer of technology on a non-exclusive basis: at the end of the five-year term of the white labelling remedy, Schneider would provide a mutually acceptable, non-transferable, non-sub-licensable, royalty-bearing non-exclusive technology licence for a period of five years to a single third party that had availed white labelling.
  • Removing exclusivity of distribution network: Schneider undertook to amend the distributorship agreement and commercial policy to remove any barriers that encourage de facto exclusivity (ie, deletion of termination clause, discontinuation of loyalty rebates).

11.1. Key developments of the past year

11.1.1. Are there any other current developments or emerging trends that should be noted?

The warehousing sector has seen a sharp increase owing to the expanding delivery network of e-commerce companies in India, many of them concentrated in tier-two cities across the country. Press Note 3 of 17 April 2020 now requires all countries sharing land borders with India or beneficial owners of investors who share land borders with India, proposing to acquire a shareholding or invest in India, will require government approval.

11.2. Coronavirus

11.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

On 28 May 2020, the Ministry of Housing and Urban Affairs issued advice to various states, union territories and other central government ministries concerning the validity and time-limit extension of all approvals, no-objection certificates and subsequent compliances for the real-estate sector. According to the advisory, the states and the concerned agencies have been advised to:

  1. consider the situation as a force majeure;
  2. extend the validity automatically, of various kinds of approvals by urban local bodies and urban development authorities or other state agencies including the commencement and completion certificates, the payment schedule of charges, including developmental charges and no-objection certificates from various agencies by nine months; and
  3. automatically extend timelines for subsequent compliances by the building proponents, as per the precondition of the permission give, for nine months.

The advisory, as outlined in point (2) and (3) above, may be considered for all those projects whose validity has expired on or after 25 March 2020. The advisory further provides that the states may issue necessary directives to municipal corporations, urban development authorities and urban local bodies enabling various approvals, payment of charges and compliances by building proponents be rescheduled without an individual application from the building proponent. Given the above advisory, the real-estate regulatory authorities of several states have extended the registration of the real-estate project including completion timelines from six to nine months. The state of Maharashtra has reduced the amount of the stamp duty by 2 per cent on immovable-property conveyance instruments from 1 September 2020 to 31 December 2020, and by 1.5 per cent from 1 January 2021 to 31 March 2020. The Reserve Bank of India announced a resolution framework for covid-19 related stress on 6 August 2020, addressing borrower defaults under the stress caused by the pandemic – without necessitating a change of ownership and without an asset-classification downgrade, it modified the existing framework. The framework for covid-19 stress covers the resolution of both personal loan accounts and corporate loan accounts. The framework applies to commercial banks, primary cooperative banks, state cooperative banks, district-level cooperative banks, all India term financial institutions and all non-banking financial companies, including housing finance companies. Only those borrower accounts that were classified as standard, but not in default for more than 30 days with any lending institution as on 1 March 2020 and having stress because of covid-19, are eligible for resolution under this framework. On 24 September 2020, the Ministry of Corporate Affairs (MCA) extended the moratorium against the filing of applications for the commencement of corporate insolvency resolution processes against corporate debtors for any defaults arising after 25 March 2020 by a further three months to 25 December 2020. The moratorium, which came into effect in June, was originally announced for a period of six months (ie, from 25 March 2020 to 25 September 2020. The MCA is authorised to further extend the moratorium until 25 March 2021. 

5.1. Key developments of the past year

5.1.1. Are there any developments, emerging trends or hot topics in foreign investment review regulation in India? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?

As a step towards the liberlisation of foreign investment in India and towards giving an impetus to defence production, the central government, in Press Note 4 dated 17 September 2020, increased the foreign direct investment cap to 74 per cent from 49 per cent through the automatic route in the defence sector. The covid-19 pandemic has adversely affected most major economies, including the Indian economy. In light of the lockdowns and market disruptions caused by covid-19, the valuations of several Indian companies have witnessed a significant decline. To combat any opportunistic takeovers or acquisitions of Indian companies, the Ministry of Commerce, on 17 April 2020, issued Press Note 3 (2020 Series) to amend the extant foreign direct investment policy; and the related amendments to the Foreign Exchange Management (Non-debt Instruments) Rules 2019 were notified in the notification dated 22 April 2020 in exercise of the powers conferred by clauses (aa) and (ab) of subsection (2) of section 46  of  the  Foreign  Exchange  Management  Act  1999, which amended the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (Revised NDI Rules). Based on the Revised NDI Rules, any investing entity that belongs to or is incorporated in or that is beneficially owned by a citizen of or a person situated in a country sharing a land border with India (concerned investor) must obtain the Indian government’s approval prior to making any investment. Over the course of the past several years, the rules relating to foreign direct investment in India were progressively liberalised; however, investors from only two of India’s neighbouring countries – Pakistan and Bangladesh – have been subject to stricter investment rules (requiring all investments to be approved by the government). Investors from China were not subject to such strict scrutiny other than in sensitive sectors such as telecom, defence and railway infrastructure. With the amendment to the Foreign Exchange Management (Non-debt Instruments) Rules the following transactions will require prior government approval (even if the sector is an automatic route sector): any acquisition of a stake in an Indian entity by a concerned investor; or any transaction that will result in a concerned investor becoming a beneficial owner of an Indian entity. Prior government approval must also be obtained for any transfers of existing foreign investment, which would result in the concerned investor securing beneficial ownership of an Indian company. Further, to facilitate seamless investments in India during the pandemic, the Finance Ministry announced a slew of measures across several domains, including, inter alia, income tax filing, corporate affairs, the Insolvency and Bankruptcy Code 2016, the banking sector, and credit schemes to micro, small and medium-sized enterprises. For instance:

  • No additional fees were charged for late filing during a moratorium period from 1 April 2020 to 30 September 2020 in respect of any document etc, that was required to be filed with the Ministry of Corporate Affairs (MCA) registry, irrespective of its due date. This step contributed towards the reduction of compliance burden and enabled previous non-compliant companies and limited liability partnerships to make a fresh start.
  • The MCA, in a circular dated 24 March 2020, relaxed the regulations for companies conducting their annual general meeting (for the financial year ending 31 December 2019) (AGM) until 30 September 2020. Further, in a general order dated 8 September 2020, the MCA extended the timeline for conducting AGMs from 30 September 2020 to 31 December 2020.
  • The Reserve Bank of India, in a notification dated 27 March 2020, permitted all commercial banks (including regional rural banks, small finance banks and local area banks), cooperative banks, All India Financial Institutions, and non-banking financial companies (including housing finance companies and microfinance institutions) to allow a moratorium of three months on payments of equated monthly installments and installments in respect of all term loans outstanding as on 1 March 2020, which was further extended by another three months (until 31 August 2020).
  • The Supreme Court, in its order dated 23 March 2020 in WP (Civil) No. 3/2020 took suo motu cognisance of the difficulty faced by the litigants in approaching various courts and tribunals owing to the national lockdown and thereby extended the limitation period in all proceedings, irrespective of the limitation prescribed under the general law or special laws whether condonable, with effect from 15 March 2020 until further orders are passed by the Supreme Court.

In the wake of strict lockdowns in India owing to covid-19, to ensure regulatory continuity and progress new and pending cases, the Competition Commission of India (CCI) in a welcome move in 2020, issued a press release clarifying the procedure for the electronic filing of notification forms as well as online video consultations. Be it Form I/Form II combinations, green channel notifications or, even, combinations with remedies, it has been business as usual for the CCI’s combination division, which has conducted its review as seamlessly as possible with limited staff and work-from-home facilities. Additionally, in a welcome development, the CCI acknowledged the need for businesses to ‘join-hands’ to address the technical and economic challenges caused by covid-19 such as: disruptions in supply chains; the rationalisation of product ranges; the halting of pipeline products; and future supply concerns. In this regard, the CCI issued an advisory to businesses recognising the need of businesses (including those dealing in critical healthcare and essential commodities) to coordinate certain activities (including the formation of efficiency enhancing joint ventures). However, the advisory clarified that these activities shall be limited to: sharing data on stock levels; timings of operation; sharing of distribution networks and infrastructure; and transport logistics, research and development, production, etc. However, the CCI emphasised in the advisory that in its assessment of such coordinated activity, it will review factors such as accrual of benefits to consumers, improvement in production or the distribution and provision of goods and services, and economic development. This caveat clarifies that the CCI will only consider coordinated activity that is necessary and proportionate to address concerns arising from covid-19. The advisory further cautions that businesses taking advantage of covid-19 to contravene the provisions of the Competition Act 2002 will not be able to claim protection from the sanctions. On 27 March 2020, the CCI issued guidance (the Revised Notes) for parties to file a Form I and clarified the scope of information to be provided to the CCI while notifying a combination in Form I. The Revised Notes were essentially issued to incorporate the amendments introduced to Form I by CCI by way of gazette notification dated 13 August 2019. The Revised Notes: provide relaxation in mapping overlaps between the parties; provide relaxation in providing market facing information; and clarify the scope of ‘complementary’ products and services. It also requires an enhanced level of disclosure: from the acquirer with respect to its group activities; and on the details of the transaction, including the rights being acquired. The Revised Notes clarify: that market shares are to be provided for three years (as opposed to the earlier requirement of one year), only when the combined market shares of the parties for any plausible alternative relevant market exceeds 10 per cent; and the scope of complementary products and services. While mapping horizontal and vertical overlaps, parties are now required to consider entities in which they hold: a direct or indirect shareholding of 10 per cent or more; a right or an ability to exercise any right (including any advantage of commercial nature) that is not available to any ordinary shareholder; or a right or an ability to nominate a director or observer in another enterprise. Further, the CCI has also recently proposed to do away with the requirement for transacting parties to disclose (in Form I) and justify non-compete covenants as part of the combination. If this proposal is successful, then parties would be expected to conduct a self-assessment of non-compete covenants while making a notification in Form I. Moreover, the CCI will continue to have the power to conclude on the effects of these non-compete covenants through the provisions pertaining to anticompetitive agreements under the Competition Act 2002 (the Competition Act). While the CCI sought public comments on its recommendation, it is yet to implement this amendment. 

5.1. International and national regulation

5.1.1. Are there any emerging trends, international regulatory schemes, national government or regulatory changes, or other hot topics in real estate regulation in India? (eg, transition to a new alternative benchmark rate upon cessation of LIBOR as benchmark rate?)

The Supreme Court of India has upheld an amendment to the Insolvency and Bankruptcy Code 2016 whereby home buyers have been included in the definition of financial creditors. Home buyers being not less than 100 under the same real estate project or being not less than 10 per cent of the total numbers of home buyers in a real state project, whichever is lesser, can file an insolvency application for initiating the insolvency resolution process against a developer should the developer fail to keep the commitment made by the developer to the home buyers.

5.1. Proposals and developments

5.1.1. Are there any other current developments or trends that should be noted?

With the increasing sophistication of offences and the pressure on investigating agencies to find evidence, investigating agencies are also testing the boundaries of attorney-client privilege (and, in some instances, successfully so). As per media reports, a law firm was recently asked by investigating agencies to hand over documents on a fraud allegedly perpetrated by an individual who had left India, since the documents available with the law firm were not covered by attorney-client privilege. Similarly, in connection with the investigation into a failure of a large conglomerate with financial and other businesses, with the consent of the new management, investigating agencies sought details of past advice provided by multiple law firms to the past management.

5.1. Key developments of the past year

5.1.1. Please highlight any recent significant events or trends related to your national anti-corruption laws.

 

The key recent developments that related to Indian anti-corruption laws are as follows:

  • A criminal reforms committee has been constituted in an attempt to amend the Indian Penal Code. A set of questionnaires have been issued by this committee to gauge public opinion on various offences. One of these issues includes private bribery, which may be criminalised by way of amendment.
  • recent amendments to the Prevention of Money Laundering Act (PMLA), which expand the definition of proceeds of crime, remove the requirement to file a first information report for a scheduled offence as a prerequisite for the Enforcement Directorate to initiate proceedings under the PMLA and declare all offences under the PMLA as cognisable and non-bailable;
  • the former chairman of United Spirits Limited being declared as India’s first Fugitive Economic Offender under the Fugitive Economic Offenders Act 2018;
  • recent forensic investigation activity in relation to the affairs of the Amrapali directors, Moser Baer India Limited and Infosys Limited, based on alleged fraud and mismanagement in the affairs of the relevant entities;
  • the Securities and Exchange Board (SEBI)’s initiative to reward whistle-blowers for cases involving companies whose securities are listed on stock exchanges in India;
  • initiation of proceedings before the Supreme Court, which will ultimately decide the retroactive applicability of the PMLA to cases of fraud under section 447 of the 2013 Act that occurred prior to April 2018;
  • the ED’s prosecution against P Chidambram, HDIL and its promoters and Moser Baer India Limited and Ratul Puri, for allegations of money-laundering;
  • the prosecution by the Ministry of Corporate Affairs against the directors, management and the statutory auditors of Infrastructure Leasing and Financial Services. The auditors are presently being investigated by the National Financial Reporting Authority, with bans having been met out to the individuals directly involved in the audit;
  • proceedings before the Supreme Court of India in relation to the ban imposed by the SEBI against Pricewaterhouse Coopers for its alleged involvement in the fraud committed by the management of Satyam Computer Services Limited; and
  • proceedings initiated by the Serious Fraud Investigation Office (against the lenders and the promoters of Bhushan Steel alleging that the senior officials of 13 banks were involved in the bank fraud committed by the promoters against the relevant banks.

 

5.1. Update and trends

5.1.1. What are the principal challenges to developing cybersecurity regulations? How can companies help shape a favourable regulatory environment? How do you anticipate cybersecurity laws and policies will change over the next year in India?

Various factors have contributed to delayed formulation of cybersecurity regulations in India, including: (i) the rapid advancement of technology that continues to outpace regulatory response; (ii) intermittent and ineffective reporting of incidents; (iii) the private sector’s inability to accurately assess criticality of available information and likely harm that may be caused in the event of an incident; (iv) lack of cross-functional expertise on the nature of cyber security incidents that may be experienced by varied sectors; and (v) government and private sector hesitation to mandate minimum standards for all categories of businesses, in view of the time and expense involved. In the last year, however, there has been a renewed focus on adoption of robust cybersecurity practice in India, both from the government and the private sector. Due to the covid-19 pandemic and the large-scale remote work and new technology adoption resulting from it, the private sector has been quite vigilant in adapting its processing, updating its budgets and responding to cyber threats in a timely and nuanced manner. Several organisations, such as the Data Security Council of India (DSCI), have proactively issued advisories and assisted other private sector organisations to seamlessly transition to safer digital processes. We expect these initiatives to guide the government in terms of level of cyber security preparedness expected from organisations, how the private sector has responded to cyber security threats, renewed focus on revision of policies and diversified skill-set of response stakeholders, and testing efficacy of protective technologies and strategies. Timely and descriptive cyber security reporting by the private sector will bring in more collaboration and clarity on better practices. The varied experiences of regulated businesses regarding cyber incidents will help guide policy, as it is likely that sensitive sectors such as healthcare and social security will require a higher standard of compliance, in view of the nature of their operations and risk assessment. We expect some regulatory developments proposed by the government to further energise compliance. The National Cyber Security Strategy 2020 is a long-awaited policy initiative of the government, and it is hoped that better security standards and priority allocation will be the norm after it is notified. The Guidelines on Regulation of Payment Aggregators and Payment Gateways require payment aggregators to implement security standards, and best practices which will benefit the financial technology sector in India.

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has been implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

On 28 May 2020, the Government of India, Ministry of Housing and Urban Affairs, issued an advisory to various states, union territories and other ministries of central government with respect to the extension of validity and time limit of all approvals, No Objection Certificates (NOCs) and subsequent compliances for the real estate sector. As per the said advisory, the states and the concerned agencies have been advised to:

  • consider the situation as a force majeure;
  • extend the validity, automatically, of various kinds of approvals by Urban Local Bodies, Urban Development Authorities and other state agencies, including commencement and completion certificates, payment schedule of charges including developmental charges, NOCs from various agencies by nine months; and
  • extend the timelines for subsequent compliances by the building proponents as per the precondition of the permission given, automatically, for a period of nine months.

It has been clarified in the advisory that the advisory as set forth in the second and third points may be considered for all those projects whose validity has expired on or after 25 March 2020. The advisory further provides that the states may issue necessary directives to Municipal Corporations, Urban Development Authorities and Urban Local Bodies so that various approvals, payment of charges and compliances by building proponents may be rescheduled without any requirement of an individual application from the building proponent. In view of the above advisory, the Real Estate Regulatory Authorities of various states have extended the registration of real estate projects as well as completion timelines by a period ranging from six months to nine months. The state of Maharashtra has reduced the amount of stamp duty by 2 per cent on the instruments of conveyance of the immovable property for a period starting from 1 September 2020 to 31 December 2020, and by 1.5 per cent for the period starting from 1 January 2021 to 31 March 2020. The Reserve Bank of India announced a resolution framework for covid-19 related stress on 6 August 2020 to address borrower defaults pursuant to the stress caused by the pandemic – without necessitating a change of ownership and without asset classification downgrade, modifying the existing framework. The framework for covid-19 stress covers resolution of both personal loan accounts and corporate loan accounts. The framework is applicable to commercial banks, primary cooperative banks, state cooperative banks, district level cooperative banks, all Indian term financial institutions and all non-bank financial companies, including housing finance companies. Only those borrower accounts that were classified as standard, but not in default for more than 30 days with any lending institution on 1 March 2020 and having stress on account of covid-19 are eligible for resolution under this framework. 

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

 

The central government and the state governments, during the covid-19 pandemic, issued orders under the National Disaster Management Act 2005 and the Epidemic Diseases Act 1897. The Epidemic Diseases Ordinance 2020 was promulgated on 22 April 2020 to empower the state governments to take special measures and prescribe regulations during the outbreak of an epidemic disease. These legislation were the primary sources of the government imposing the lockdown and rules surrounding it.

At the Union level, a relaxation on tax return filings was announced through the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020. There was a further relaxation on the tax deducted at source announced at the annual budget. The Central Board of Direct Taxes relaxed the reporting of information as well.

The Reserve Bank of India (RBI) started by imposing a three-month moratorium on loans, which was extended to 31 August 2020. However, there is still some uncertainty as the issue is sub-judice with the Supreme Court and the RBI has not issued fresh guidelines on the moratorium. However, the moratorium imposed against insolvency proceedings was extended up to 25 December 2020. Orders in this matter were reserved on 17 December 2020 and are still awaited.

Timelines for compliances have been extended by the Ministry of Corporate Affairs. These relaxations include conducting the annual general meeting of a company through video conferencing, and the date for the meeting had been extended to 31 December 2020. On the capital markets front, SEBI has extended the timeline for compliances on depository participants as well as trading members. This also includes measures to ease compliance such as permitting digital signature certificates for authentication of filings.

For good order, it is recommended that clients seek advice on the updated compliance requirements under various regulators. There have been continuous changes introduced by the government to address various issues caused by the pandemic. There has been a further review of some of these changes by the judiciary and the state governments.

A repository of resources tracking the changes introduced by the government to tackle the pandemic can be found here: https://www.azbpartners.com/covid-19/

 

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

The DSCI (which is an industry body set up by the National Association of Software and Service Companies, established for data protection in India, for the purposes of establishing standards and practices for cyberspace to make it safe and secure) issued a paper titled ‘Business Resiliency and Security during COVID-19’, which outlines how security organisations have handled the unprecedented challenges brought about by the pandemic and is a summation of best practices that may be adopted by organisations, going forward. The DSCI has also issued various advisories on the best practices for cyber security to be implemented by IT administrators and employees working from home, privacy implications arising from remote work and cybersecurity protocols to be adopted by hospitals and law enforcement agencies. Further, an advisory has also been issued by the Computer Emergency Response Team (CERT-In) to combat the covid-19 related phishing campaigns by malicious actors against individuals and businesses. Further, to combat cyber security issues, certain regulators such as the Department of Telecommunication have been issuing, inter alia, various security-related circulars to update stakeholders, such as: ‘Best Practices – Cyber Security‘, which provides protocols to be followed by organisations; and ‘Unsafe Practices to be Avoided at Workplace for Cyber Security‘, which describes unsafe workplace practices that should be avoided, such as using common passwords, leaving devices unlocked, ignoring operating systems and software updates, downloading files without scanning, etc. It is recommended for all organisations to, in a timely manner, appoint a chief information security officer, formulate policies and allocate stakeholder responsibility, and review the available advisories (especially in their particular sector). It is also advisable for organisations to adapt their cyber security preparedness in light of the degree of harm that can be caused to their business and stored information, in the event of an incident. The Reserve Bank of India (RBI), in its ‘Financial Stability Report’ issued in July 2020, recognised the banking industry as a ‘target of choice’ for cyberattacks. In the post-covid-19 lockdown, the number of cyberthreat incidents has considerably surged, in view of which the RBI has taken several measures to ensure the adoption of other practices and procedures. As per the ‘Financial Stability Report’ issued in July 2020, one such example is the advisory issued by the RBI on 13 March 2020 to the regulated entities to ensure that access to systems was secure and critical services to customers were operating without disruption. From then onwards the RBI, in close coordination with the CERT-In, has issued over 10 advisories to supervised entities on various cyberthreats and best practices to be adopted. In addition, a series of video conferences were conducted regarding cybersecurity preparedness and broad cyber/IT threats in order to sensitise supervised entities. Further, owing to the increase in the number of digital transactions on account of the covid-19 crisis and associated threats, the government is in the process of setting up a system to secure the financial sector of the country from cyberattacks, and is establishing a specialised agency, CERT-Fin, for this purpose.

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

The covid-19 pandemic has adversely affected most major economies, including Indian economy. In light of the lockdowns and market disruptions caused by covid-19, the valuations of several Indian companies have witnessed a significant decline. To combat any opportunistic takeovers or acquisitions of Indian companies, the Ministry of Commerce, on 17 April 2020, issued Press Note 3 (2020 Series) to amend the extant foreign direct investment policy; and the related amendments to the Foreign Exchange Management (Non-debt Instruments) Rules 2019 were notified in the notification dated 22 April 2020 in exercise of the powers conferred by clauses (aa) and (ab) of subsection (2) of section 46  of  the  Foreign  Exchange  Management  Act  1999, which amended the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (Revised NDI Rules). Based on the Revised NDI Rules, any investing entity that belongs to or is incorporated in or that is beneficially owned by a citizen of or a person situated in a country sharing a land border with India (concerned investor) must obtain the Indian government’s approval prior to making any investment. Further, to facilitate seamless investments in India during the pandemic, the Finance Ministry announced a slew of measures across several domains, including, inter alia, income tax filing, corporate affairs, the Insolvency and Bankruptcy Code 2016, the banking sector, and credit schemes to micro, small and medium-sized enterprises. For instance:

  • No additional fees were charged for late filing during a moratorium period from 1 April 2020 to 30 September 2020 in respect of any document etc, that was required to be filed with the Ministry of Corporate Affairs (MCA) registry, irrespective of its due date. This step contributed towards the reduction of compliance burden and enabled previous non-compliant companies and limited liability partnerships to make a fresh start.
  • The MCA, in a circular dated 24 March 2020, relaxed the regulations for companies conducting their annual general meeting (for the financial year ending 31 December 2019) (AGM) until 30 September 2020. Further, in a general order dated 8 September 2020, the MCA extended the timeline for conducting AGMs from 30 September 2020 to 31 December 2020.
  • The Reserve Bank of India, in a notification dated 27 March 2020, permitted all commercial banks (including regional rural banks, small finance banks and local area banks), cooperative banks, All India Financial Institutions, and non-banking financial companies (including housing finance companies and microfinance institutions) to allow a moratorium of three months on payments of equated monthly installments and installments in respect of all term loans outstanding as on 1 March 2020, which was further extended by another three months (until 31 August 2020).
  • The Supreme Court, in its order dated 23 March 2020 in WP (Civil) No. 3/2020 took suo motu cognisance of the difficulty faced by the litigants in approaching various courts and tribunals owing to the national lockdown and thereby extended the limitation period in all proceedings, irrespective of the limitation prescribed under the general law or special laws whether condonable, with effect from 15 March 2020 until further orders are passed by the Supreme Court.

In the wake of strict lockdowns in India owing to covid-19, to ensure regulatory continuity and progress new and pending cases, the Competition Commission of India (CCI) in a welcome move in 2020, issued a press release clarifying the procedure for the electronic filing of notification forms as well as online video consultations. Be it Form I/Form II combinations, green channel notifications or, even, combinations with remedies, it has been business as usual for the CCI’s combination division, which has conducted its review as seamlessly as possible with limited staff and work-from-home facilities. Additionally, in a welcome development, the CCI acknowledged the need for businesses to ‘join-hands’ to address the technical and economic challenges caused by covid-19 such as: disruptions in supply chains; the rationalisation of product ranges; the halting of pipeline products; and future supply concerns. In this regard, the CCI issued an advisory to businesses recognising the need of businesses (including those dealing in critical healthcare and essential commodities) to coordinate certain activities (including the formation of efficiency enhancing joint ventures). However, the advisory clarified that these activities shall be limited to: sharing data on stock levels; timings of operation; sharing of distribution networks and infrastructure; and transport logistics, research and development, production, etc. However, the CCI emphasised in the advisory that in its assessment of such coordinated activity, it will review factors such as accrual of benefits to consumers, improvement in production or the distribution and provision of goods and services, and economic development. This caveat clarifies that the CCI will only consider coordinated activity that is necessary and proportionate to address concerns arising from covid-19. The advisory further cautions that businesses taking advantage of covid-19 to contravene the provisions of the Competition Act 2002 will not be able to claim protection from the sanctions. On 27 March 2020, the CCI issued guidance (the Revised Notes) for parties to file a Form I and clarified the scope of information to be provided to the CCI while notifying a combination in Form I. The Revised Notes were essentially issued to incorporate the amendments introduced to Form I by CCI by way of gazette notification dated 13 August 2019. The Revised Notes: provide relaxation in mapping overlaps between the parties; provide relaxation in providing market facing information; and clarify the scope of ‘complementary’ products and services. It also requires an enhanced level of disclosure: from the acquirer with respect to its group activities; and on the details of the transaction, including the rights being acquired. The Revised Notes clarify: that market shares are to be provided for three years (as opposed to the earlier requirement of one year), only when the combined market shares of the parties for any plausible alternative relevant market exceeds 10 per cent; and the scope of complementary products and services. While mapping horizontal and vertical overlaps, parties are now required to consider entities in which they hold: a direct or indirect shareholding of 10 per cent or more; a right or an ability to exercise any right (including any advantage of commercial nature) that is not available to any ordinary shareholder; or a right or an ability to nominate a director or observer in another enterprise. Further, the CCI has also recently proposed to do away with the requirement for transacting parties to disclose (in Form I) and justify non-compete covenants as part of the combination. If this proposal is successful, then parties would be expected to conduct a self-assessment of non-compete covenants while making a notification in Form I. Moreover, the CCI will continue to have the power to conclude on the effects of these non-compete covenants through the provisions pertaining to anticompetitive agreements under the Competition Act. While the CCI sought public comments on its recommendation, it is yet to implement this amendment. 

5.2. Coronavirus

5.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

Besides waiving various procedural compliances under certain laws, the Indian regulators have, inter alia, allowed companies to hold meetings through video conferences, to use digital signatures and to contribute towards awareness programmes and research related to covid-19 as part of their corporate social responsibility obligations. Further, the government rolled out various relief packages to address the ill-effects of lockdown on the economy and those affected. The government has also undertaken various measures to improve the ease of doing business in India. Clients would need to evaluate these in light of their specific circumstances.   * The authors would like to acknowledge Abhay Raj Singh Bundela, an associate at AZB & Partners, for his assistance with this chapter.

6.1. Recent developments

6.1.1. Are there in India any emerging trends or hot topics regarding antitrust regulation and enforcement in the pharmaceutical sector?

In October 2020, the Competition Commission of India (CCI) launched a market study to assess the competitive landscape in the pharmaceutical sector. The CCI indicated that the objective of the study is to assess antitrust concerns in the drug supply chain. The CCI has indicated that the study would primarily focus on the distribution segment of the pharmaceutical market, with a view to understanding:

  • discounts and margin policies at the wholesale and retail levels of the distribution system;
  • the role of trade associations in relation to various aspects of the distribution business;
  • regulatory rationalisation of trade margins and its impact on price and competition; and
  • the impact of e-commerce on price and competition.

The study also aims to investigate the proliferation of branded generic drugs in India and how this may affect competition, and to assess potential hurdles relating to the entry of biosimilar drugs in India. The market study is being conducted in consultation with relevant stakeholders, including pharmaceutical companies, stockists, chemists, sector experts, trade associations, doctors and regulators. 

6.1. Enforcement and compliance

6.1.1. Describe any national trends in criminal money laundering schemes and enforcement efforts. Describe any national trends in AML enforcement and regulation. Describe current best practices in the compliance arena for companies and financial institutions.

In the wake of economic offenders such as Nirav Modi and Vijay Mallya, who have fled the country since their fraud came to light, the Fugitive Economic Offenders Act 2018 (the Economic Offenders Act) was enacted with effect from 21 April 2018. The legislation gives the Indian government the power to attach all the assets (and not just the assets acquired from the proceeds of crime) of an individual against whom an arrest warrant has been issued for committing a prescribed offence where the value exceeds 1 billion rupees. The government has also stated that it will establish an international cooperative mechanism to attach the foreign assets of such declared fugitives. Absconding liquor baron Vijay Mallya became the first person to be declared a ‘fugitive economic offender’ under the Economic Offenders Act. The Directorate of Enforcement (ED) initiated proceedings against Mallya in 2016, alleging that he had used his business ventures to siphon huge amounts of money out of India. He had fled from India and moved to the United Kingdom. The High Court of Justice, according to publicly available information, dismissed his appeal against the Westminster Magistrates’ Court’s extradition order on 20 April 2020. Further, he has also lost leave to appeal against the High Court’s decision before the Supreme Court of the United Kingdom. Certain securities held by Mallya that had been attached by the ED have been sold to recover approximately 10 billion rupees. In February 2018, the ED registered a money laundering case against billionaire diamond dealer Nirav Modi for alleged fraud approximating 13 billion rupees. Modi fled the country and moved to the United Kingdom, despite a series of criminal summons issued to him by Indian courts. He was arrested in London, and the ED is working with the Crown Prosecution Service of the United Kingdom to extradite him back to India. According to publicly available information, a Special Court declared Modi as a fugitive economic offender in December 2019 on an application filed by the ED. By an order dated 25 September 2018, the Reserve Bank of India (RBI) imposed a monetary penalty of 50 million rupees on Federal Bank for non-compliance with the RBI directions in relation to, inter alia, certain know your customer and AML norms as well as for failure to pay compensation for delays in the resolution of ATM-related customer complaints. With the objective of reviewing anti-bribery and anti-corruption laws in India, certain amendments to the Prevention of Corruption Act 1988 (PCA) were introduced with effect from 26 July 2018. Under the erstwhile PCA, only the demand side of corruption (ie, the solicitation and acceptance of a bribe) was a criminal offence, and there was no provision to directly criminalise the supply side of corruption or the offering of a bribe to obtain an undue advantage, which has now been included as an offence. Further, the PCA now also specifically prescribes the consequences of an offence thereunder when committed by a company. By virtue of the same set of amendments, the new offences under the PCA have been listed as ‘scheduled offences’ under the Prevention of Money Laundering Act 2002. The RBI, on 18 December 2020, amended the Reserve Bank of India (Know Your Customer (KYC)) Directions 2016. These amendments make it, inter alia, mandatory for the regulated entities to upload KYC records pertaining to accounts of legal entities whose accounts are opened after 1 April 2021 onto the Central KYC Records Registry (CKYCR), pursuant to Rule 9 (1A) of the PML Rules. Even the KYC data of accounts of individual customers and legal entities opened prior to the above-mentioned date have to be incrementally uploaded on the CKYCR.

6.2. Coronavirus

6.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

Indian regulatory authorities have waived various procedural compliances under certain laws and extended certain compliance timelines. Other measures taken include contribution towards awareness programmes and research related to covid-19 being permitted as part of corporate social responsibility obligations of companies. Further, the government rolled out various relief packages to address the ill effects of lockdown on the economy and those affected. The government has also undertaken various measures to improve the ease of doing business in India. Clients would need to evaluate these in light of their specific circumstances.   * The authors would like to acknowledge Abhay Raj Singh Bundela, an associate at AZB & Partners, for his assistance with this chapter.

7.1. Recent developments

7.1.1. Are there any emerging trends, notable rulings or hot topics related to cryptoassets or blockchain in India?

The Supreme Court ruling of March 2020, setting aside the Reserve Bank of India (RBI) Circular, has been notable in bringing about a positive attitude to crypto trading in the Indian markets. Unlike resistance to cryptoassets, blockchain has recently gained much traction. The government report that forms the basis for the proposed legislation banning cryptocurrency acknowledges that blockchain will play a major role in the new digital age and explicitly excludes this technology from the purview of the ban. Private entities and government institutions have aggressively pushed for innovation using this technology. Noteworthy developments include the Andhra-Pradesh government developing and using blockchain in banking and finance as well as exploring the use of smart contracts. The defence minister has also declared that blockchain has ‘Revolutionised the existing paradigm of warfighting,’ and that the ministry is seeking to employ this technology to better safeguard the security of the critical infrastructure. In its white papers, the RBI has consistently highlighted the various uses of blockchain and encouraged its deployment in the financial services market. Given the vote of confidence, the Indian market is keenly following the policy initiatives that the government may potentially release in the coming years.

7.2. Coronavirus

7.2.1. What emergency legislation, relief programmes and other initiatives specific to your practice area has been implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

The Indian government has issued various guidelines concerning financial aid, health measures, etc, to address concerns arising from the covid-19 pandemic. Given the lack of clarity in regulating cryptocurrency and cryptocurrency businesses, no specific measures or initiatives have been taken in this area.

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