By: Dhruv Kaushal, Associate at Qui Prior Law Associates
In view of the nationwide lockdown and the on-going tussle with the novel coronavirus, the direct impact has been on the various centers of trade, which have either been shut down, or are facing extremely lowered frequency of business. The entire nation has been in lockdown since 25th March 2020, declared by the Central Government of India. As on date, the lockdown is expected to continue until 3rd May 2020.
Pursuant to a notification dated 17th April 2020, the Department for Promotion of Industry and Internal Trade (functioning under the Ministry of Commerce and Industry) issued an amendment under the Foreign Direct Investment Policy (FDI Policy). The notification is a result of a review and analysis of the Extant FDI policy, with the desired goal of preventing against any potential opportunistic takeovers or acquisitions of Indian companies, due to the current pandemic. As per the notification, para 3.1.1 of the Extant FDI Policy as contained in the Consolidated FDI Policy, 2017 has been amended.
Existing Position- The position prior to the aforementioned amendment, is that a nonresident (non-indian) entity can invest in India, subject to the FDI Policy except in those sectors or activities which are prohibited. However, a citizen entity of Bangladesh and Pakistan, or an entity registered in both these countries can only invest under the government route. Furthermore, for entities belonging to Pakistan, sectors or activities such as defence, space and atomic energy are also prohibited for investment in addition to the sectors or activities already mentioned in that category.
Position post the Notification - The amended para 3.1.1 (a) states that an entity: (i) of a country which shares land border with India; or (ii) where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can only invest under the government route i.e. upon seeking prior approval and authorization from the government. Additionally, the amendment also states that the transfer of ownership of an existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1 (a), such change will also require government approval. The decision will take effect from the date of notification under the FEMA.
The notification has only been introduced with the objective of securing interests of small enterprises, medium enterprises and enterprises vulnerable to a potential takeover as a result of the widespread economic losses as a result of COVID-19. Similar such amendments have been introduced in Spain and Italy, which are also nations heavily impacted as a result of the pandemic. The restrictions will apply against China, Bangladesh, Afghanistan, Nepal, Bhutan and Myanmar.