On April 17, 2020, Departmentfor Promotion of Industry and Internal Trade came up with an amendment in ForeignDirect Investment Policy, 2017 vide Press Release No. 3 (2020 Series) in order
to shield the corporates from hostile acquisitions which may arise due to
downward trend in the share prices of the Company. The experts are debating
over the legality of this move of the Government and terming it as
discriminatory & violative of rules set out by World Trade Organisation
(“WTO”) i.e. restricting market access and national treatment. It appears that
the decision to restrict FDI came as a reception to acquisition of stake in
HDFC by the People’s Bank of China through open market.
Though the intent of this
amendment was to inflict definite curtailment for safeguarding against
opportunistic acquisitions from neighbouring countries, the overall unambiguous
safeguard still remains quizzing. The aforementioned press circular doesn’t mention
and define the term “Neighbouring Countries of India”. However, the same shall
be construed in accordance with the word “shares land border with India” and
shall accordingly mean China, Bangladesh, Pakistan, Myanmar, Nepal, Bhutan and
Afghanistan.
The amendment entails the
mandatory obligation to take Government approval route before investing into
India, directly or indirectly, on each entity of the Neighbouring Country or
where the beneficial owners (including individual) is situated in or citizen of
Neighbouring Country. In addition to this, any change of ownership of existing
or future FDI of an entity in India, directly or indirectly, resulting in the
beneficial ownership being situated in a Neighbouring Country would also necessitate
prior Government approval.
Any FDI in India require the
entity which receives the investment from outside India to file Form FC-GPR
within 30 days of allotment of shares via Entity Master Form on FIRMS Portal
and acquisition of shares of Indian Entity requires reporting of transfer of
shares in Form FC-TRS. The Government of India will face hindrances in keeping
an eye on subsequent change in Beneficial Ownership between two non-resident
entities which don’t require reporting to Government.
The afore decision will be
implemented from the date of FEMA Notification. Previously, a citizen or entity
of Bangladesh and Pakistan were required to take prior approval of Government
before investing into India. It is unequivocally to be noted that citizen or
entity of Pakistan still can’t invest into defence, space, atomic energy and
other prohibited sector through any route.
Furthermore, the definition of
“Beneficial Owner” remains in question as the same has not been yet clarified
by the Press Release. It may be clarified in FEMA Notification and it may
resemble with the existing definition given in Section 90 of the Companies Act,2013 read with Companies (Significant Beneficial Ownership) Rules, 2019 in
accordance with the recommendation of Financial Action Task Force. Companies
Act, 2013 prescribes two criteria i.e. first is exercising 10% stake in the
reporting entity and majority stake in chain of ownership and second is
exercising control or significant influence in the reporting company.
For avoidance of doubt, it is
clarified that the aforementioned restriction for taking Government Approval
apply to the Foreign Direct Investment (FDI) and not to Foreign Portfolio
Investment (FPI). Since the regulations for FPI comes under the ambit of
Securities and Exchange Board of India (SEBI), the SEBI is engaged digging and
scrutinising the compositions of Foreign Portfolio Investors. The conceptual
details about FDI and FPI is set forth below:
Foreign Direct Investment (FDI)
Foreign Portfolio Investment (FPI)
Hence, a person of Neighbouring
Country would require approval from Government in following cases only:
- Investment into Unlisted Indian Company (Even acquiring 1 Equity Share would constitute as FDI)
- Investment in Listed Entity: 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.
Fully
Diluted Basis and Capital Instruments are construed as following:
Fully
Diluted Basis means the total number of shares that would be
outstanding if all possible sources of conversion are exercised.
Capital
Instruments are equity shares, debentures, preference shares
and share warrants issued by an Indian company.
The FPI License is granted by
Custodian Banks acting in a capacity of Designated Depository Participants on
behalf of SEBI in accordance with SEBI (FPI) Regulations, 2014.
Chinese Firms are controlling these FPIs in the following
manner:
- Infusing 25% of the Fund Corpus
- Exercising significant influence and control
- Controlling composition of board of directors & senior management
SEBI has increased scrutiny to
identify the beneficial owners of these funds and also, SEBI has sent a letter
to some Asian Countries (especially China) seeking details of Investment. As
per the present applicable laws, Chinese Entities can freely acquire up to 10%
stake in the Listed Indian Companies without Government Approval. We expect
SEBI would come out with an amendment in FPI regulations to avoid hostile
acquisitions in Listed Indian Entities at an underneath valuation.
Disclaimer
The
entire content of this document has been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness, and
reliability of the information provided, we assume no responsibility,
therefore. Users of this information are expected to refer to the relevant existing
provisions of applicable laws. The user of the information agrees that the
information is not professional advice and is subject to change without notice.
We assume no responsibility for the consequences of the use of such
information.
ABOUT THE AUTHOR
SHIVAM
GERA
Dynamic and passionate professional with
progressive experience in advising on issues in corporate laws, managing
implications in commercial transactions, private equity, estate planning,
drafting commercial agreements and deal evaluation. Being Career oriented, the
author has completed his graduation in commerce from Satyawati College,
University of Delhi and Qualified Company Secretary. He is currently serving as Assistant Manager at Findoc Financial Services Group.
Contact:
+91-8130562651
Email: shivam@myfindoc.com
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