A. Introduction:

Given the unprecedented crisis that all countries are facing globally, is India too (much like other countries such as the US)moving inwards and backwards? From the reading of the FDI press note 3 (“PN3, which is yet to come into effect) it looks like India is playing cautious, keeping one close eye on the country which is the subject matter of most headlines today – China!

B. What are the new restrictions under PN3?

(i) Except in case of prohibited sectors, FDI is permitted either under automatic route or approval route so far as prescribed conditions have been complied with. Further in so far as FDI from India’s neighbouring countries are concerned, the restrictions specifically spelt out conditions for investments coming from Bangladesh and Pakistan. PN3 has now increased the scope to all neighbouring countries i.e. investment through any country which share land border with India. This will include China (“LB Country”) or where the beneficial owner of an investment into India is situated in LB Country or LB Country’s citizen.

(ii) Transactions involving transfer of ownership of any existing or future FDI (directly or indirectly) in India, resulting in the beneficial ownership will also fall within its remit, and will be subject to Government approval.

(iii) Its not a blanket ban on any investment opportunity from LB Country. However, the parties will simply have to undergo an additional step of seeking approval from the relevant governmental or regulatory authority. It remains to be seen if there will be attendant investment conditions, which sector is it likely to impact more than others or will it be forthcoming at all.

C. Coverage:

The rationale i.e. ‘curbing opportunistic takeovers / acquisitions of Indian companies due to the current Covid-19 pandemic’ set out in PN3 itself, gives clear insight into the thought process of policy makers that:
(i) Restrictions imposed, if any, may be temporary and can be relaxed as the time progresses, while India tides over the Covid-19 crisis (i.e., Earlier this year, India did take steps including, ban on export of PPE and other equipment and travel ban); and

(ii) From a legal interpretation standpoint, although mandatory approval process has to be followed for all FDI investments, the focus clearly seems to be towards transaction resulting in transfer of substantial ownership of Indian companies to citizens of/ entities incorporated in LB Country. Outlook towards pure investment transactions not resulting in takeovers / acquisitions may not be as stringent.

D. ‘Sovereign pocket veto’ trends:

(i)Obvious reason – the Covid-19 pandemic coupled with resultant erosion in the valuation of enterprises;

(ii)That said, global trends, given the recent curbs on trade and travel, have been to encourage to localising the supply chain and to protect the local companies from becoming hostile takeover targets. Various government, including EU, USA, Australia have exercised ‘sovereign pocket veto’ or have put in place an ‘assertive regulatory framework’ to curb or restrict companies being acquired or taken over. Such restrictions, of course, may vary on the scale of severity

E. Way forward:

(i)We expect Government of India to issue a detailed notification amending the Foreign Exchange Management (Non debt Instruments) Rules, 2019 (“New Guidelines”).

(ii)We can only be hopeful that the New Guidelines will clarify the key areas of concern one is likely to have with the PN3: (i) fate of transactions executed but not closed, (ii) pure financial investments / alternate investment funds, (iii) exceptions for green field projects, (iv) any cap or threshold restrictions etc. Also, currently it seems that foreign venture capital investment and foreign portfolio investment are likely to be in the clear, but the devil will be in the detail and we will have to wait to see the New Guidelines.

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