The outbreak of Covid 19 forced the government to impose a nationwide lockdown forcing various companies and businesses to operate from home or shut down for the time being. The loss bear by the companies due to the same stands out a mile. The economic fallout from the lockdown has been massive and unprecedented. A loss for one is likely to be an opportunity for others. Many foreign entities might dive in to establish their roots in the Indian mainland by the acquisition of weakened Indian firms. Alerted by the same, the Indian government has revised the foreign direct investment policy (“FDI Policy”).
In the past several months, the Government of India released many circulars and has made various amendments to the erstwhile policy in order to protect the Indian companies from opportunistic takeovers by foreign entities. On October 28, 2020, the Department of Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, released a consolidated version (“Consolidated Document”) incorporating all the restrictions notified earlier this year on FDI policy from entries of such countries that share land border with India, including China. The policy necessitates governmental approval for any investment from entities, investment-owners or citizens hailing from countries that share land borders with India.
It was touted as “a policy framework on FDI, which is transparent, predictable and easily comprehensible.” According to the Ministry of Commerce and Industry, these changes in the policy were imperative to restrain any kind of opportunistic takeovers resulting from the Covid-19 pandemic. This compilation relating to the various decisions taken by the government came into effect from the 15th of October, 2020. “Cases pertaining to sectors/activities under Government approval route requiring security clearance as per the extant Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, FDI Policy and security guidelines, as amended from time to time,” DPIIT said in the Consolidated Document.
The document also states that in case of the transfer, directly or indirectly, of ownership of any current or future FDI in an individual in India resulting in beneficial ownership falling within the limitation/purpose of paragraph 3.1.1(a), such subsequent change in beneficial ownership would also entail the approval of the Government of India. It is pertinent to note that these amendments do not intend to stop the investment flows from foreign entities but merely ensures a strict scrutinization of these investments.
The Consolidated Document also outlines the changes in FDI in e-commerce, such as preventing an entity related by equity to the e-commerce platform from doing business, banning suppliers from purchasing more than 25% of their inventory from the platform, and its group companies, as well as preventing exclusive launches. It also mandates the e-commerce entities with FDI to maintain a report of statutory auditors for the preceding financial year evidencing compliance with e-commerce guidelines. The same must be done by the 30th day of September every year.
The Consolidated Document also states the government’s decision to authorise FDI up to 26 percent on entities engaged in the news digital media sector through the government approval route. With respect to start-ups, the FDI Policy incorporates that for sectors where up to 100% FDI is permitted under the automatic route, it is acceptable to issue equity shares against the import of capital goods/ machinery/ and pre- operative/pre-incorporation expenses.
Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the government route, in sectors or activities other than defence, space, atomic energy and sectors or activities prohibited for foreign investment.
The aim of this policy is to act as a deterrent and to further our Prime Minister’s policy of ‘First Develop India.’