Hot Off The PressNews

Union Ministry of Information and Broadcasting issued a public notice to facilitate eligible entities involved in uploading/streaming of news and current affairs through digital media, to comply with the decision of Union Government on 18-09-2019, which had permitted 26% FDI under Government approval route.

In a Public Notice, available on its website, the Ministry has laid out the detailed actions to be undertaken by eligible entities to comply with this decision, within a month. Under the notice,

  1. Entities having foreign investment below 26% may furnish an intimation to the Ministry of Information & Broadcasting within one month from today giving the following:-

(a) Details of the company/entity and its shareholding pattern along with the names and addresses of its Directors/shareholders,

(b) The names and address of Promoters/Significant Beneficial Owners,

(c) A confirmation with regard to compliance with pricing, documentation and reporting requirements  under the FDI Policy, Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and  Foreign Exchange Management (Mode of Payment and Reporting of Non-debt Instruments) Regulations, 2019 along with copies of relevant reporting forms in support of the past/existing foreign investment  and downstream investment(s), if any, and

(d)  Permanent Account Number and the latest audited/unaudited Profit & Loss Statement and Balance Sheet along with the Auditor report.

(ii) Entities which, at present, have an equity structure with foreign investment exceeding 26% would give similar details as at (i) above to the Ministry of Information & Broadcasting within one month from today, and take necessary steps for bringing down the foreign investment to 26% by 15-10-2021 and seek approval of the Ministry of Information & Broadcasting.

(iii) Any entity which intends to bring fresh foreign investment in the country has to seek prior approval of the Central Government,  through the Foreign Investment Facilitation Portal of DPIIT,  as per the requirements of  (a) FDI Policy of Government of India and  DPIIT Press Note No. 4 of 2019 (dated 18.9.2019)  in this regard and (b) Foreign Exchange Management (Non-debt Instruments)(Amendment) Rules, 2019 vide Notification dated 5.12.2019.

NOTE:- Investment means to subscribe, acquire, hold or transfer any security or unit issued by a person resident in India.

(iv) Every entity has to comply with the requirements of citizenship of the Board of Directors and of the Chief Executive Officers (by whatever name called). The entities are required to obtain security clearance for all foreign personnel likely to be deployed for more than 60 days in a year by way of appointment, contract or consultancy or any other capacity for the functioning of the entity, prior to their deployment. For this purpose, the entities will apply to the Ministry of Information & Broadcasting at least 60 days in advance and the proposed foreign personnel shall be deployed by the entity only after prior approval of this Ministry.

The Public Notice can be accessed at the URL below:

https://mib.gov.in/sites/default/files/Public%20Notice%20%20regarding%20FDI%20Policy%20.pdf


Ministry of Information & Broadcasting

[Press Release dt. 16-11-2020]

[Source: PIB]

Legislation UpdatesNotifications

Foreign Direct Investment (FDI) is considered as a major source of non-debt financial resource for economic development. FDI flows into India have grown consistently since liberalization and are an important component of foreign capital since FDI infuses long term sustainable capital in the economy and contributes towards technology transfer, development of strategic sectors, greater innovation, competition and employment creation amongst other benefits. Therefore, it is the intent and objective of the Government of India to attract and promote FDI in order to supplement domestic capital, technology and skills for accelerated economic growth and development. FDI, as distinguished from Foreign Portfolio Investment, has the connotation of establishing a ‘lasting interest’ in an enterprise that is resident in an economy other than that of the investor[1].

The Commerce and Industry Ministry, Government of India released the consolidated Foreign Direct Investment (FDI) policy 2020 on the 28th of October which is a single document containing all the decisions that have been taken by the Government with respect to FDI in the last three years. As per the Department for Promotion of Industry and Internal Trade (DPIIT), the policy has come into effect from October 15. The DPIIT has done away with press notes and has compiled all policies related to foreign investment into a single document thus making things easier and convenient for the investors.

In a bid to provide investor-friendly framework to foreign entities, the government has granted relaxations in a few sectors such as mining, single brand retailing, digital news, etc. In a big boost to an otherwise dull economy, this year India witnessed a 16 % increase in FDI on a year-to-year basis.

This policy supersedes all circulars/press notes/press releases issued by the DPIIT in the past. Dating back to earlier this year, certain restrictions were notified by the government applicable on FDI from overseas citizens or entities hailing from neighbouring countries that share a land border with India including China. These restrictions were placed in an attempt to prevent hostile and opportunistic takeovers of companies whose business might have suffered during the lockdowns imposed in light of the Covid19 pandemic. Now, these restrictions have found their way in the consolidated policy. The basic intent behind these restrictions is to ensure transparency when any investment flows from our neighbouring countries. These provisions are in no way intended to stop any and all probable investment from these countries but are a direct result of the government feeling the need for bringing certain amendments and making the legal framework more stringent and robust.

In a first of its kind in the country, an investment limit of 26 % has been introduced and imposed on FDI in digital media including the likes of web based content. This can be done only via the government approval route.

In a situation where the ownership of any existing or future FDI Investment in an entity in India is transferred directly or indirectly, leading to beneficial ownership then the same would invoke the restrictions stated under para 3.1.1(a) and any such change in ownership would require approval from the government’s end.

Key aspects of the Consolidated FDI Policy, 2020 are:

Investment from India’s neighbouring countries

Relevant portion from the policy is reproduced below-

An entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country – can invest only under the Government approval route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route.

No such investment is allowed from Pakistan in defence, space, atomic energy and sectors/activities that are prohibited for foreign investment.

In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, results in the beneficial ownership falling within the restriction/purview of the above – this will also require Government approval.

Investment cap on digital news media

A 26 % cap on FDI has been presented in the segment that covers digital news (transferring or streaming of news), which likewise requires government endorsement. This carries it at standard with the investment cap on newspaper and periodical distributions and the publication of Indian editions of foreign magazines covering news and current affairs, which are likewise dependent upon the government endorsement route.

Compliance in E-commerce sector

The most recent FDI policy expresses that it is compulsory for e commerce businesses with foreign investment to acquire and keep up a statutory audit report by September 30 consistently for the former financial year, which in turn would indicate their compliance with the country’s legal framework.

The 2020 FDI policy sets out all the recent changes that have been made in terms of e-commerce:

Disallowing an entity related by equity to the web based e-commerce business from doing business on the website portal;

Limiting merchants from purchasing in excess of 25 % of their stock from the platform and its group organizations; and

Exclusive product launches have been banned.

These norms have been in force since the past two years when they were implemented formally.

In this way, e-commerce business elements in India that recieve FDI can just take part in business to business (B2B) e-commerce and not in business to buyer (B2C) e-commerce.

Investment from Pakistan

The FDI norms remain unchanged for our controversial neighbours. A citizen or entity from Pakistan can invest through the government route in any sector with the exception of defence, space, atomic energy and sectors generally preventing foreign investment.

Read the policy here: FDI POLICY: FDI-PolicyCircular-2020-28October2020


[1] Consolidated FDI Policy, October 15 2020


Yashvardhan Shrivastav, Editorial Assistant has put this story together

COVID 19Op EdsOP. ED.

The Government of India recently made changes to its Foreign Direct Investment Policy (FDI Policy/FDI) given the COVID-19 pandemic and the ongoing market volatility, sell offs etc., and the general economic turndown. Responding to fears that foreign investors rake up on shares of ailing companies with diminished valuations during this period, the changes seek to regulate investments from certain identified countries.

In this article, we explore the regulatory setup of FDI in India, effect of the present changes and compliance requirements that arise due to these changes.

Regulatory Framework of FDI in India

FDI is a policy decision of the Government of India, under the aegis of the Department for Promotion of Industry and International Trade (‘DPIIT’), Ministry of Commerce & Industry.

FDI policies are introduced and modified through Press Notes/Press Releases, as notified by Reserve Bank of India (RBI). Essentially, these are amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘the TISPRO Regulations’) or the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. These notifications take effect from the date of issue of Press Notes/Press Releases, unless specified otherwise therein.

In case of any conflict, the relevant Foreign Exchange Management Act, 1999 (“FEMA”) notification will prevail. The procedural instructions are issued by RBI by way of circulars. The regulatory framework, over a period, thus, consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

Sector wise Regulations

FDI in India is prohibited for activities which fall under the Prohibited Sector (atomic energy, railway operations, gambling and betting, chit funds, real estate, manufacture of tobacco products etc.). The intention behind such prohibition is to ensure FDI is restricted for sensitive sectors that concern national security, defence etc.

FDI is permitted in certain sectors under Automatic Route up to 100% (for e.g. IT sector). Under this route, no prior permission is required from the Government of India, before investments are brought in.

The other route is Government Approval Route, wherein permission from the DIPP or relevant regulator is required to bring in FDI. Permitted sectoral caps are also provided in the

Policy for any FDI which falls under the category of Approval Route. For instance, in the banking sector, 49% FDI is permitted under Automatic Route and FDI up to 74% is permitted under Government Approval Route.

Changes implemented vide Press Note 3 (2020 Series) dated April 17, 2020

The DPIIT, issued a Press Note (No. 3) on April 17, 2020 (‘PN3’) which alters Para 3.1.1 of the Consolidated FDI Policy, 2017. The extant FDI Policy was reviewed with an intention to curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.

The Consolidated FDI Policy, 2017 (“Con FDI Policy”) earlier restricted Bangladesh and Pakistan from investing in India. Any person from these countries could invest in India only after obtaining prior permission of the Government of India, through the Government Approval Route.

Para 3.1.1 as it stood till Press Note 3 (2020 Series)

A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, 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.

Press Note 3, dated 17-4-2020 extends the Government Approval route to all countries that share a land border with India. In effect, five other nations, i.e. Afghanistan, Bhutan, China, Myanmar and Nepal, in addition to Pakistan and Bangladesh, are also subject to restrictions under the FDI Policy, through Government Approval Route. In effect, investment from these seven nations can be made in India only by obtaining prior permission with the Government of India, and is subject to the Sectoral Cap under extant FDI Policy. 

Revised Position: Press Note 3 (2020 Series)

Para 3.1.1: 3.1.1(a) A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, 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.

Beneficial Ownership (‘BO’)

Through PN3, the Government has also introduced the aspect of transfer of BO of any existing or future FDI in an entity in India. It provides that where the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly results in BO, which falls under the restrictions imposed in Para 3.1.1(a) of the FDI Policy (i.e. if the investor belongs to any one of the seven countries), such change in the BO will also require Government approval.

Revised Position: Press Note  3 (2020 Series)

3.1.1(b) In the event of the 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 restriction/purview of Para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.

Concept of Beneficial Ownership, Beneficial Interest and Significant Beneficial Ownership

BO is not defined under the FDI Policy. The term ‘Beneficial Ownership’ is only defined under Section 2(fa) of the Prevention of Money Laundering Act, 2002 and reads as under:

An individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.”

Further, Section 89 of the Companies Act, 2013 read with the Companies (Management and administration) Rules, 2014 (2018 amendment) provides for the distinction between legal owners and beneficial owners of shares having Beneficial Interest (“BI”),  to include any direct or indirect right or entitlement in a share through any contract or arrangement or otherwise to the rights attached with the share or receive dividend on its distribution. Any change in BI needs to be reported by the Company to the regulator, Ministry of Corporate Affairs (“MCA”).

Additionally, Section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018, brings out the concept of the Significant Beneficial Ownership (‘SBO’) and states that whenever there is change in SBO, the Companies need to report to the MCA about the SBO. In order to ascertain the SBO, the following points need to be considered to ascertain if there is any reporting requirement or not:

  1. Identify if there are any indirect holding through a body corporate, LLP, Partnership, Trust, HUF;
  2. If individual holding is 10% or more in the Company, the company needs to report to the MCA;
  3. If individual shareholding, voting rights, dividend right exceeds 10%, SBO needs to be reported to MCA.

On examination of the records available on MCA, RBI and the regulatory authority, will have a fair idea about the investments made by the neighbouring country through Automatic Route. Any changes in the SBO or the BI will now require in addition to reporting to MCA, an in-principle approval from the DPIIT or the approval from the relevant authority under the  Government of India.

Conclusion

Indian entities have been significantly benefited by the investments made by or neighbouring countries, especially FDI from China. According to sources[1], Chinese FDI into India is approximately $6.2 billion, there is significant investments in start-ups.

This policy of the Government does not impact the existing investments made in India. There will be closer look at the investments that the country receives from the neighbouring countries due to the volatility in the market as a result of the COVID-19 pandemic.

These amendments will be effective once the requisite amendments are made to Rule 6 of the FEMA (Non-Debt Instruments) Rules, 2019. Any direct or indirect transfer of ownership of any existing FDI in the Indian entity which is more than 10% will have to be reported both to the MCA and to the exchange control regulator, RBI.

The impact on the economy, especially with this pandemic COVID –19, particularly on the start-ups is unknown. It is possible that that there will be closer inspection on the all FDIs. In respect of FDIs from neighbouring nations, since such investments now require prior approval from the Government i.e. Approval Route, and since Government Approval for FDI will requires significant amount of time, it is expected that the Companies expecting such FDI should be prepared for delays in receiving investments which is likely to have implications for future investments by venture capital funds, especially the start-ups that have seen significant investments from Chinese investors. The impact on the country’s GDP in view of this policy decision is very unclear at this stage. 


*Advocate, Shivadass & Shivadass (Law Chambers)

[1] https://www.thehindubusinessline.com/info-tech/how-china-dominates-tech-investments-in-india/article31380773.ece

COVID 19Legislation UpdatesNotifications

Government of India has reviewed the extant Foreign Direct Investment(FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017. Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry has issued Press Note No. 3(2020 Series) in this regard.

The present position and revised position in the matters will be as under:

Present Position 

Para 3.1.1: A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, 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.

Revised Position 

Para 3.1.1:

3.1.1(a) A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, 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.

3.1.1(b) In the event of the 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 restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.

The above decision will take effect from the date of FEMA notification.


Ministry of Commerce & Industry

[Press Release dt. 18-04-2020]

[Source: PIB]

Cabinet DecisionsLegislation Updates

To permit foreign investment upto 100% by those NRIs, who are Indian Nationals, in case of M/s Air India Ltd., the Union Cabinet approved to amend the extant FDI Policy to permit Foreign Investment (s) in M/s Air India Ltd by NRIs, who are Indian Nationals, upto to 100% under automatic route.

As per the present FDI Policy, 100% FDI is permitted in scheduled Air Transport Service/Domestic Scheduled Passenger Airline (Automatic upto 49% and Government route beyond 49%).  However, for NRIs 100% FDI is permitted under automatic route in Scheduled Air Transport Service/Domestic Scheduled Passenger Airline. Further, FDI is subject to the condition that Substantial Ownership & Effective Control (SOEC) shall be vested in Indian Nationals as per aircraft rules, 1937.  However, for M/s Air India Ltd., as per the present policy, foreign investment(s) in M/s Air India Ltd. Including that of foreign Airline(s) shall not exceed 49%, either directly or indirectly, subject to the condition that substantial ownership and effective control of M/s Air India Ltd. shall continue to be vested in Indian Nationals.  Therefore, although 100% FDI is permitted under automatic route for NRIs in Scheduled Air Transport Service/Domestic Scheduled Passenger Airline, it is restricted to be only 49% in the case of M/s Air India.

Benefits:

In light of the proposed strategic disinvestment of 100% of M/s Air India Ltd. by the Government of India, M/s Air India Ltd. will have no residual Government ownership and will be completely privately owned, it has been decided that foreign investment in M/s Air India Ltd be brought on a level playing field with other scheduled airline operators.  The amendment in FDI policy will permit foreign investment in M/s Air India Ltd at par with other Scheduled Airline Operators i.e. upto 100% in M/s Air India Ltd by those NRIs, who are Indian Nationals.  The proposed changes in FDI Policy will enable foreign investment by NRIs into M/s Air India Ltd. upto 100%, under automatic route.

          Above amendment to the FDI Policy are meant to liberalise and simplify the FDI policy to provide ease of doing business in the country.  Leading to largest FDI inflows and thereby contributing to growth of investment, income and employment.

Background:

FDI is a major driver of economic growth and a source of non-debt finance for the economic development of the country. The FDI policy is reviewed on an ongoing basis, with a view to attract larger volumes of foreign investment inflows into the country. Government has put in place an investor friendly policy on FDI, under which FDI up to 100% is permitted on the automatic route in most sectors/activities.

FDI policy provisions have been progressively liberalized across various sectors in the recent past to make India an attractive investment destination. Some of the sectors include Defence, Construction Development, Trading, Pharmaceuticals, Power Exchanges, Insurance, Pension, Other Financial Services, Asset Reconstruction Companies, Broadcasting, Single Brand Retail Trading, Coal Mining, Digital Media etc.

These reforms have contributed to India attracting record FDI inflows in the recent past.  FDI inflows in India stood at US $ 45.15 billion in 2014-15 and have consistently increased since then.  FDI inflows increased to US $ 55.56 billion in 2015-16, US $ 60.22 billion in 2016-17, US $ 60.97 billion in 2017-18 and the country registered its highest ever FDI inflow of US $ 62.00 billion (provisional figure) during the last Financial Year 2018-19. Total FDI inflows in the last 191/2 years (April 2000- September 2019) are US $ 642 billion while the total FDI inflows received in the last 51/2 years (April 2014- September 2019) are US $ 319 billion which amounts to nearly 50 % of total FDI inflow in last 191/2 years.

Global FDI inflows have been facing headwinds for the last few years. As per UNCTAD’s World Investment Report 2019, Global Foreign Direct Investment (FDI) flows slid by 13% in 2018 to US $1.3 trillion in the previous year, that is the third consecutive annual decline. Despite the dim global picture, India continues to remain a preferred and attractive destination for Global FDI flows. However, it is felt that the country has the potential to attract far more Foreign Investment which can be achieved, inter-alia, by further liberalizing and simplifying the FDI policy regime.


Cabinet

[Source: PIB]

[Press Release dt. 04-03-2020]

Business NewsNews

In order to ensure due compliance of the FDI policy on e-Commerce, Press Note 2 (2018) has been issued. It puts in place certain conditions. These conditions include:

  1. An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.
  1. e-Commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only.

This Press Note is effective from February 01, 2019.

Representations have been received to defer the implementation of Press Note 2. The FDI policy on e-Commerce, first pronounced through Press Note 2 of 2000, permitted 100% FDI in B2B e-commerce activities. With a view to provide clarity to the extant policy and after extensive stakeholder consultations, guidelines for FDI on the e-commerce were issued vide Press Note 3 (2016). To provide further clarity to FDI policy on e-commerce, Press Note 2 (2018) was issued.

Stakeholder consultations on creating a framework for National Policy on e-Commerce with representatives from Government Ministries, Departments, Reserve Bank of India, industry bodies, e-commerce companies, telecom companies, IT companies and payment companies have been held. Issues regarding the e-commerce sector are regularly reviewed by the Government.

The e-commerce sector is expected to keep growing in future because of a number of reasons. The FDI policy on e-commerce has remained unchanged. Better enforcement of this policy will contribute significantly to growth of this sector over medium and long term.

Ministry of Commerce & Industry