Revision of FDI Policy: Background and Ramification

Press Note No. 3 (2020 Series) dated 17.4.2020


‘The Foreign Exchange Management Act, 1999’ (‘FEMA’), the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 coupled with the Consolidated Foreign Direct Investment Policy are sacrosanct to Foreign Direct Investment [FDI’] into India and these govern all conditions of FDI such as, Eligible Investors, Entry Routes for Investments (Automatic route/Govt approval route), Caps on Investments -Sector wise, Prohibited Sectors/Permitted Sectors for FDI, Foreign Investments into downstream investments by eligible Indian entities etc.

FDI in India is permitted under the Automatic route/ Govt approval route, tagged to the sectoral caps, if any barring FDI in the following:

  • Lottery Business including Government/private lottery, online lotteries, etc.
  • Gambling and Betting including casinos etc.
  • Chit funds
  • Nidhi company
  • Trading in Transferable Development Rights (TDRs)
  • Real Estate Business or Construction of Farm Houses ‘Real estate business’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.
  • Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  • Activities/sectors not open to private sector investment e.g.(I) Atomic Energy and (II) Railway operations (other than permitted activities mentioned in para 5.2).
  • Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

The FDI Policy Reforms in the recent past includes sectors such as Defence, Pharmaceuticals, Medical Devices, Rail infrastructure, Banking-Private, Insurance etc, with appropriate conditionalities and further sectoral caps with automatic/ government approval route as applicable.

The FDI Policy has always strived to safeguard national security and sensitivity vis a vis economic interest. As seen from the policy literature the ineligibility of an investor under the permitted sectors, has been primarily associated with investors from Bangladesh and Pakistan falling within the ambit of Cl 3.1 of the Policy which provided that a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

In the current FDI trend there is significant presence of other neighbouring countries apart from Bangladesh and Pakistan in the investment scene particularly in the Start Up segment.

Press Note No. 3 (2020 Series) dated 17.4.2020 [‘Press Note-3’]

The current downturn in business due to COVID 19 situation has prompted the Government of India by its Press Note No. 3 (2020 Series) dated 17.4.2020, to review the FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current pandemic.

Amendment made to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019

By a notification dated 22nd April 2020, Government notified the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 which amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 [‘Rules’] to incorporate the provisions of Press Note-3 in a suitable manner.

Countries covered under Press Note-3:

The revised policy covers investments from all countries which shares land borders with India and therefore going forward China, Pakistan, Bangladesh, Myanmar, Bhutan, Nepal and Afghanistan will be on the radar.

Effect of Amendment

The following now require the approval of the Government:

  1. FDI by a non-resident entity from a Country covered under Press Note 3;
  2. FDI where the beneficial owner of an investment into India is situated in or is a citizen of any such country;
  3. FDI from a citizen of Pakistan or an entity incorporated in Pakistan. FDI cannot be made in defence, space, atomic energy and sectors/activities prohibited for foreign investment;
  4. Transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restrictions mentioned in 1 to 3 above.

The amendment has adopted a prospective language whereby it may be inferred that investments completed up to 21st April 2020 ought to be grand-fathered.

What is ‘Beneficial Ownership’

The amendment does not throw clarity on the term ‘Beneficial Owner’ of the Investment. Further, this term is neither defined or explained under FEMA, the Rules nor under the FDI Policy and therefore recourse may have to be taken in this regard from other relevant statutes like the Companies Act 2013 and its relevant Rules.

Section 89 of the Companies Act 2013 conjointly read with Section 90(1) of the said Act and the Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’) explains “Beneficial Interest” as the right or entitlement of a person/trust (including non-residents) singly or together with another, to exercise any rights attached to the share, or to receive any dividend or such distributions attached to such shares. This may be directly or indirectly through a contract or otherwise. The SBO Rules further elicit details with respect to Significant Beneficial Owners obligations. Any persons/trust as per sec 89 or 90 having a beneficial interest not less than 10% in the share of a company or the right to exercise or the actual exercising of significant influence or control is a Significant Beneficial Owner. Such SBO is obligated to follow the norms of declaration under the statute.

The above may well be the guiding regime, for the operational nuances under the present revision, till such time the Ministry of Economic Affairs clarifies such position.

Beneficial Owner under the Revised Policy does not specify any threshold as seen in Significant Beneficial Owner Rules. One may choose the more conservative view to tread on a safer path. It may be prudent to consider both shareholding and the control rights to calculate the threshold. A conservative and risk-free analysis may be a desirable approach, till such clarifications are made available by the department.

The revision does not make a clear mention of resident/permanent resident aspects when touching upon the term “situated or citizen of any such country”. This may lead to intriguing queries among investors. Existing investors from the specified countries may soon ponder for answers as to whether a future rights issue by their investee entity may invoke the trigger under this amendment, though it may be only a pro- rata increase of shareholding and not increasing the percentage holding per-se.

Other Nuances

Undoubtedly many investments that were hitherto in the automatic route entry prior to the amendment, now have to now tread the more cumbersome route of Government approval. This may further slowdown the revival of the investment market from these countries. It may also trigger questions to ponder for venture capital deals which are on the threshold of closing. The re- classification of entry route for such VC deals may be catastrophic on timelines and consequent deal closing, and more alarming, as it is now tagged to the contingency of the approval itself. Further from the start up perspective many of our Unicorn ventures may be left in the lurch in respect of further series of funding from their existing VCs, that may now attract the cumbersome governmental approval route. It may also call for the analysis of acquisition documentation for any trigger of Material Adverse Effect in acquisitions, pending deal closure.

One may wonder about the impact of the amendment on LLPs, AIFs and DRs. Currently FDI is permitted under the automatic route in LLPs operating in sectors / activities where 100% FDI is allowed through the automatic route, and there are no FDI linked performance conditions. Hence forth for any investments from the specified countries, it directly alters the entry route from automatic to government approval.

In the case of an Alternative Investment Fund (AIF), any downstream investment may come under the scanner under the garb of beneficial ownership as the case may be and it may call for due analysis under the new regime.

Depository Receipts (DRs) at the time of conversion may be a matter of concern too, from beneficial ownership perspective.

The exit option by way of transfer of investments to entities covered under the revised regime will be more time consuming and compliance heavy for parties. The hybrid securities like CCPs, GDRs, CCDs in today’s private equity business too attract the regulatory compliance requisites. Consequentially the sentiments of drudgery associated to exiting Indian ventures may play a significant role in investment decisions by venture capitalists from the neighbour states.

Procedure to be followed for obtaining the Government Approval

The procedures for obtaining the Government approval is onerous and meticulous in data collection and is considered by designated Administrative Ministries or Departments as below.

  • Application for proposal of investment to be filed on the online portal of Foreign Investment Facilitation
  • DPIIT to identify the concerned Dept/Ministry and forward the proposal accordingly within 2 days.
  • Same to be circulated to RBI for FEMA perspective comments
  • Additional clarifications if sought for to be provided within one week
  • Proposal for Investments from Pakistan/ Bangladesh to have Home Ministry endorsement
  • Proposals involving FDI above INR 50bn to be placed before Cabinet Committee Economic Affairs
  • On completion of proposal to be cleared/ rejected and informed accordingly within 8-10 weeks

The documents to be filed for obtaining the Government approval may cover all relevant documents such as:

  1. Certificate of Incorporation of the Investee & Investor Companies/Entities (Investee company may be a proposed entity and may not be incorporated)
  2. Memorandum of Association (MOA) of the Investee & Investor Companies/Entities
  3. Board Resolution of the Investee & Investor Companies/Entities
  4. Audited Financial Statement of Last Financial Year of the Investee & Investor Companies/Entities
  5. Article of Association of the Investee & Investor Companies/Entities
  6. List of Names and addresses of all foreign collaborators along with Passport Copy/ Identification Proof of the Investor Company/Entity
  7. Diagrammatic representation of the flow and funds from the original investor to the investee company and Pre and Post shareholding pattern of the Investee Company
  8. Affidavit stating that all information provided in hard copy and online are the same and correct
  9. Signed copy of the JV agreement/shareholders agreement/ technology transfer/trademark/brand assignment agreement (as applicable), in case there are existing ventures
  10. Board resolution of any joint venture company
  11. Certificates of Incorporation and charter documents of any joint venture/company which is a party to the proposed transaction
  12. Copy of Downstream Intimation
  13. Copy of relevant past FIPB/SIA/RBI approvals, connected with the current proposal (in case of amendment proposal)
  14. Foreign Inward Remittance Certificate (FIRC) in case investment has already come in and in case of post-facto approval
  15. In the cases of investments by entities which themselves are pooled investment funds, the details such as names and addresses of promoters, investment managers as well as all the contributors to the investment fund
  16. List of the downstream companies of the Indian company and the details of the equity held by the Indian Company along with the details of the activities of the companies
  17. High Court order in case of a scheme of arrangement
  18. Valuation certificate as approved by a Chartered Accountant
  19. Non-compete clause certificate of the investor and investee company in case of investment in pharmaceutical sector (As per Annexure 10 of Consolidated FDI Policy Circular of 2016), and as amended from time to time
  20. Certificate of statutory auditors as mandated in the FDI policy, as applicable


In plain sight, it is indeed an onerous task entangled in time consuming procedures and regulatory compliance and contingent on the approval being granted. It may also dampen the ease of doing business sentiments too. However, amidst the free fall of market capitalisation figures of Indian companies, in these pandemic days, this revision of the FDI policy are indeed the need of the hour. Albeit the procedural quagmire and interim mayhem, it would protect the national interest by averting any belligerent acquisitions or back door entry into any of the critical sector entities, especially when the presence of neighbourhood investors is significant in our FDI market.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought in relation to specific circumstances. The views in this article are personal.


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