Foreign Direct Investment (FDI) is an investment-driven by a Company or individual from one country to another country for business interests. FDI requires capital investment and provisions of management and technology. India amended FDI Policy with an aim to curb Opportunistic Takeover of firms which were impacted by the lockdown which was influenced during COVID-19 pandemic. The amended policy has been in effect dated on October 15 2020.
REASONS BEHIND THE AMENDMENT & ITS AFTERMATH
- Secure existing Indian firms - Economic downturn has decreased the valuation of many firms in India during the last quarter in the year 2019 and due to COVID-19, it has created further slowdown where they are vulnerable to hostile takeovers. The steady domestic market of China may gain an opportunity.
- Hinder Chinese Supremacy on Indian Market - During the fiscal year 2019, China’s investment in India has transcended up to $8 billion, which is greater than investments made by neighbouring countries of India. Additionally, it could lead to the significant influence of Chinese markets on the Indian economy.
- To prevent domination in strategic fields - India is concerned with the emerging Chinese market in telecom, digital technology and advanced fields. The economic decline will create misery in these fields, the change will have a greater influence on competitive India firms.
- Adapting global trend - European Countries and Australia have tightened their foreign investment-related rules to prevent curb of foreign takeovers. India will also strengthen its foreign-related Investment policy to fortify the Indian economy and the influence of foreign markets.
AMENDMENTS MADE IN SOME FACETS AND AREAS THAT REMAIN UNTOUCHED
FDI policies are amended through Press Notes, as notified by RBI. These are amendments to the Foreign Exchange Management Regulations, 2017 (TISPRO) or the Foreign Exchange Management Rules, 2019.
Revisions in: Vide Press Note 3 (2020 Series) dated on April 17, 2020
Para 3.1.1(a) - Amendment made in Para 3.1.1 of the FDI Policy, 2017. The Government Approval route to countries Neighbouring India such as Afghanistan, Bhutan, China, Myanmar and Nepal, Pakistan and Bangladesh, are also subject to restrictions under the FDI Policy. Investment from these countries can be made in India only by obtaining prior permission with the Government of India and is subject to the Sectoral Cap under extant FDI Policy.
Para 3.1.1(b) - Beneficial Ownership was not defined under the FDI Policy. Beneficial Ownership was only defined under Section 2(fa) of the Prevention of Money Laundering Act, 2002.
Amendment made in Para 3.1.1(b) of the FDI Policy, 2017. The shifting of ownership of any existing or future FDI in an entity in India, resulting in the Beneficial Ownership falling under the restriction of Para 3.1.1(a), such subsequent change in Beneficial Ownership will require Government approval.
Section 89 of the Companies Act, 2013 with the Companies Rules, 2018 provides for the distinction between legal owners and Beneficial Ownership of shares having Beneficial Interest, to include any direct or indirect right or entitlement in a share through any arrangement or otherwise to the rights attached with the share or receive dividend on its distribution. Any change in Beneficial Interest needs to be reported by the Company to the regulator, Ministry of Corporate Affairs.
Section 90 of the Companies Act, 2013 with the Companies Rules, 2018, brings out the concept of the Significant Beneficial Ownership. In order to ascertain the Significant Beneficial Ownership, the following points need to be considered
- Ascertain indirect holding through a body corporate, LLP, Partnership, Trust, HUF if there is any such holdings.
- If individual holding is 10% or more in the Company, the company needs to report to the Ministry of Corporate Affairs.
- If individual shareholding, voting rights, dividend right exceeds 10%, Significant.
Beneficial Ownership needs to be reported to the Ministry of Corporate Affairs. On inspection of the records available on the Ministry of Corporate Affairs, RBI and the regulatory authority, will have an idea about the investments made by the countries through the Automatic Route.
India has not breached any principles of the World trade Organization by amending FDI policy, since the global body's rules do not cover foreign Investment. The amendment is viewed as the rise of high-power business diplomacy in foreign relations. Many countries including India have started rethinking the nature of commercial engagement with China.
The restriction can be implemented for the period until India recovers and applied to companies in the consumer retail and automotive sectors where FDI was under the automatic route. The government should iterate clarifications on these issues at the earliest. There are no clauses regarding the applicability of these restrictions, the amendments to these Rules are effective to countries with large economic countries, but the countries with normal economies will tend to suffer.
The Economic Times News, View: India’s urbanisation challenges forward (Nov. 28, 2020, 11:00am).
India Briefing, India’s Consolidated FDI Policy, 2020: Key Aspects (Nov. 28, 2020, 11:15am)https://www.india-briefing.com/news/indias-consolidated-fdi-policy-2020-key-aspects-21067.html/
Civils daily, FDI in Indian Economy - Recent amendments to FDI policy – a boon or a bane? (Nov. 28, 2020, 12:25am)
Times now, Can India’s FDI Policy change work to its advantages while affecting the investment from China? (Nov. 28, 2020, 4:00pm) https://www.timesnownews.com/business-economy/economy/article/can-india-s-fdi-policy-change-work-to-its-advantage-while-affecting-investment-from-china/588350#:~:text=New%20Delhi%3A%20With%20a%20view,share%20a%20border%20with%20India.
(Article) Government of India, Ministry of Commerce & Industry, Department for Promotion of Industry and Internal Trade, FDI Policy Section (Nov. 28, 2020, 4:55pm) https://dipp.gov.in/sites/default/files/pn3_2020.pdf
The Times of India Business, Finance ministry notifies changes in FDI policy under FEMA (Nov. 28, 2020, 3:45pm)
Corporate Professionals (Nov. 28, 2020, 6:00pm)