[India] ANALYSING PRESS NOTE 3 (FDI POLICY)

Niharika Sinha

The Department of Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India (‘DPIIT’), in April, 2020 introduced an amendment to paragraph 3.1.1 of the Consolidated FDI Policy, 2017 (‘FDI Policy’) as Press Note 3 (“PN3”). As per PN3, any Foreign Investment by 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 be done under the Government route only. Further, the amendment also focuses on 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 above-mentioned restriction. Such subsequent change in beneficial ownership will also require Government approval.

This amendment prohibits direct or indirect investment in India by entities incorporated in any of the seven countries that share a land border with India without prior government clearance. This approval will be required for all industries, including those sectors which otherwise fall under automatic route, regardless of the amount of FDI.

Prior to the implementation of PN3, any non-resident investor/entity could invest in India subject to the Foreign Direct Investment Policy and only citizens/entities incorporated in either Bangladesh or Pakistan required the prior approval of the Government before undertaking any investment.

The modification brought about by Press Note 3 (2020) will force inward investments from countries bordering India to seek prior clearance from the government, subjecting each such venture to excessive scrutiny and delays.

Further, in line with the Press Note 3 (2020), the Ministry of Corporate Affairs (“MCA”) has recently introduced certain pivotal amendments to the Companies Act, 2013 (“CA 2013”) and the rules made thereunder, with the primary objective of enforcing additional measures for strict implementation of PN3.

KEY AMENDMENTS

1. Restriction on Directorship in Indian Companies – The MCA introduced the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (“Appointment Rules”) on June 01, 2022, which mandates that any person (being a national of a Neighbouring Country) who seeks appointment as a director in an Indian company will now require prior security clearance from the Ministry of Home Affairs (“MHA”) at (i) the time of filing Form DIR -2 (which is the consent procured from an individual to act as a director of a company); and (ii) at the time of filing Form DIR-3 (which is the application for allotment of a Director Identification Number (“DIN”)).

2. Mandatory Declaration – MCA has introduced additional declarations required to be made by individuals/entities at different stages, like:

- express declaration in the securities transfer form, if such transferee is required to obtain the approval of the Government under the Non-debt Instruments (“NDI”) Rules. This additional declaration intends to cast direct responsibility of compliance with PN3 on the acquirer/transferee.

- an explicit declaration is required to be given by the first subscribers to the Memorandum of Association, as well as the first directors, on whether or not, they are required to obtain the prior approval of the Government under NDI Rules. This measure ensures that requisite PN3 approval is in place, prior to incorporation of an Indian company.

- in case of a compromise, arrangement, merger or demerger between an Indian company and a company incorporated in a neighbouring country, an additional declaration will need to be submitted at the stage of making the application with the National Companies Law Tribunal (NCLT), stipulating whether such company or body corporate is required to obtain the prior approval of the Government under the NDI Rules for consummating the transaction.

3. Restriction on Allotment – In addition to the self-declarations specified above, the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 was notified by the MCA (“Allotment Rules”), pursuant to which, an Indian investee company is not allowed to make an offer or invitation of securities to a body corporate incorporated in, or a national of a neighbouring country, unless such body corporate or the national has obtained the prior approval of the Government under the NDI Rules, to the extent applicable.