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Indian FDI Policy, 2020 - Key Changes

Recently, the Department of Promotion of Industry and Internal Trade, Government of India announced its consolidated foreign direct investment (FDI) policy, in effect from October 15, 2020. The aforementioned policy has been announced after a long gap of three years, the last one having been announced in August, 2017. It supersedes all press notes, press releases, circulars or clarifications issued by DPIIT on and prior to October 15, 2020. In other words, the revised policy provides India’s consolidated foreign investment framework. This article discusses the key highlights of the policy.

First, the consolidated policy imposes restrictions on foreign investment coming from neighbouring countries, sharing border with India, including China, in order to prevent takeovers of indigenous entities, financially and operationally affected by the pandemic, by opportunistic firms in such neighbouring countries. As per the policy, any investment coming from such countries, whether through a corporation or an individual, irrespective of the quantum of the investment, is to be approved by the government. In other words, any investment whatsoever from neighbouring countries will have to come through approval route of the government. Further, any investment from Pakistan in defence, atomic energy, space or other sectors prohibited for FDI by government shall not be permitted. In case the transfer of ownership of any entity results in beneficial ownership under the aforementioned restrictions, government approval shall be required.

Second, the policy introduces FDI caps on certain sectors. It imposes a 26% FDI cap on digital news and media platforms, which requires government approval, bringing it in consonance with the cap on investment in newspapers, news and current affairs magazines and publications. For defence manufacturing, the FDI limit has increased from 49% to 74% under automatic route along with certain specific conditions. For single brand retail trading, 100% FDI under automatic route has been permitted.

Third, the policy introduced additional compliance obligations for e-commerce entities having foreign investment. It is mandatory for such entities to maintain and file a statutory audit report by September 30, each year affirming their compliance with the laws of Republic of India. Further, changes detailed in the policy include prohibiting a related party of e-commerce entity from doing business on the website of the latter, restricting vendors from purchasing their inventory in excess of 25% from e-commerce platform or its group companies and ban on exclusive product launches.

Fourth, investments can now be made by non-residents in equity shares, fully, compulsorily or mandatorily convertible debentures and compulsorily or mandatorily convertible preference shares of Indian companies through the automatic route or approval route. Under the automatic route, permission of government is not required however in approval route, prior permission of government is mandatory.

Fifth, the policy provides for mandatory requirement of FC-TRS (Foreign Currency Transfer) acknowledgement prior to recording the transfer of shares in a company’s books. As a necessary corollary, buyers of shares shall ensure that their FC-TRS filings are in order so that the process of share transfer can be expedited.

In conclusion, the objective behind Government of India’s announcement of the FDI policy seems to be the protection of indigenous entities, suffering from the pandemic, from the opportunistic takeovers by foreign entities, particularly by neighbouring countries including Pakistan and China. This concern was sparked by Chinese Central Bank’s acquisition of shares of HDFC Bank in India during the lockdown. The government has ever since ensured that all investments coming into India from neighbouring countries require its approval, even in sectors where investments were permitted through automatic route. Similarly, the FDI cap on news and digital media platforms has been imposed considering national security considerations and reports of Chinese influence on digital media and apps. Cumulatively, the government has introduced the policy as a protectionist measure, necessary during the economic slowdown caused by COVID-19 pandemic.

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