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India has a comprehensive Foreign Direct Investment (FDI) Policy. FDI Policy permits foreign investments in India under two routes i.e. automatic route and the government approval route. In the year 2020, the government amended the FDI Policy and imposed stricter norms on foreign investors from neighbouring countries. Subsequently, even the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) were also amended. To align with these amendments, a series of amendments were introduced by the Ministry of Corporate Affairs (MCA) pertaining to foreign investments from neighbouring countries.
To prevent hostile takeovers of Indian companies by foreign investors from neighbouring countries, the DPIIT amended the FDI policy vide Press Note No. 3 dated 17th April 2020. As per the amendment, foreign investors from neighbouring countries are permitted to invest in India only with prior government approval. In the erstwhile regime, only individuals and entities from Pakistan and Bangladesh were required to obtain government approval before investing in India. However, pursuant to the amendment, investments from individuals or entities from Pakistan, Afghanistan, China, Bhutan, Nepal, Myanmar, and Bangladesh can invest in India only after obtaining government approval.
If foreign investors from neighbouring countries want to invest in India, they will have to get prior approval from the Government of India before investing in the shares of an Indian company. The amendment will apply in two cases:
Pursuant to the amendment in the FDI Policy, subsequent changes were also made by the Ministry of Corporate Affairs[1] in the Company Law Rules. These amendments have been discussed in detail below:
Indian companies accepting foreign investments in the form of share issues should check if the shareholder confirms the status of the proposed shareholder. In the case of a foreign investor from a neighbouring country, the company has to ensure that approval from the government has been acquired by the proposed shareholder. To ensure government approval, the MCA has introduced mandatory reporting compliance in the NDI Rules. The mandatory reporting requirements implemented by MCA are as follows:
To protect Indian entities from opportunistic takeovers, India amended its FDI Policy. This move will prevent foreign investors from neighbouring countries from actively investing in Indian start-ups, eroding the Indian-ness of Indian entities. This move was taken during the pandemic to protect Indian entities whose valuations have been hit given the correction in equity markets arising from the pandemic and lockdown. However, it will have a long-lasting beneficial effect. The intention behind the amendment is to preserve the Indian manufacturing and technology sectors.
Read our Article: All you need to know about Foreign Investment
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