BACKGROUND

On 17 April 2020, the Government of India through the Department for Promotion of Industry and Internal Trade had issued Press Note 3 of 2020 (PN3) that amended the consolidated Indian foreign direct investment (FDI) policy to curb opportunistic takeovers / acquisitions of Indian companies which have been adversely impacted by the COVID-19 pandemic. This protectionist measure was followed by amendments to the Foreign Exchange Management (Non-debt Instrument) Rules, 2019 (NDI Rules).

On 5 May 2022, in line with the said amendments, the Ministry of Corporate Affairs notified the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 (Amendment). The Amendment, amongst others, amends Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (Rules) that lays down the procedure for private placement of securities by Indian companies.

ANALYSIS

The Amendment provides that an offer of any securities under Section 42 of the Companies Act, 2013 (Act) read with Rule 14 of the Rules can only be made to a body corporate incorporated in, or a national of, a country which shares a land border with India (Regulated Neighbours), with prior government approval has been obtained by such Regulated Neighbours under the NDI Rules.

Further, the Amendment also requires an affirmation from a proposed allottee of securities of an Indian company as to whether prior approval under the NDI Rules is required to be obtained or not in Part B of the private placement offer cum application letter (in Form PAS-4) (Offer Letter). In the event prior approval under the NDI Rules is required, then such prior approval is required to be enclosed as a part of the Offer Letter.

Under the NDI Rules, investment by a person resident outside India being an entity of a country, which shares land border with India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country, requires prior government approval.

COMMENTS

The PN3 was brought in by the government in order to regulate and control opportunistic takeovers / acquisitions of Indian companies which were adversely affected on account of COVID-19 pandemic by Regulated Neighbours.

The Amendment is a measure to harmonise the provisions of the Act with the FDI Policy and the NDI Rules. Vide such Amendment, a proposed investor would now be required to additionally make a declaration to such company if such investor is required to obtain prior government approval under the NDI Rules. In the event, such investor is required to obtain prior government approval, then the proposed investor must enclose such approval as an attachment to Part B of the Offer Letter.

We continue to see various attempts of the government to align the provisions of the Act along with the FDI policy and NDI Rules. This is also evident from the notification of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2022 dated 30 May 2022 that amended Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 pursuant to which a similar declaration is required to be made as part of the application for cross border merger, compromise, or arrangement of Indian company and a Regulated Neighbour under Section 230 of the Act. Further, the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 notified on 1 June 2022 has also extended changes brought in by PN3 pursuant to which an individual who is a resident of a country that shares land border with India seeking appointment as a director in an Indian company, or desiring to obtain a director identification number, is now required to obtain a prior security clearance from the Ministry of Home Affairs (MHA). Additionally, every individual seeking to be appointed on the board of an Indian company is also mandated to give a declaration to such Indian company of whether or not he / she is required to obtain a prior security clearance from the MHA.

It will be interesting to see if the government takes similar measures for alignment with PN3 and NDI Rules with respect to other legislations that allow direct / indirect acquisitions of Indian companies including but not limited to the insolvency and bankruptcy law, and preferential allotment under the Securities and Exchange Board of India regulations.

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