To curb opportunistic takeovers or acquisitions of Indian companies during the COVID-19 pandemic, India has revised its foreign direct investment policy. Investors from bordering countries will now need prior government approval for making such investments in an Indian company.

Introduction

In the wake of the economic and financial crisis caused by the COVID-19 pandemic, India has revised its foreign direct investment (FDI) policy through Press Note 3 of 2020 (Press Note) imposing stricter norms on foreign investments in Indian companies from an investor based out of bordering countries. The primary objective of the revised FDI policy is to curb any opportunistic takeovers or acquisitions of Indian companies during the COVID-19 pandemic.

Under the amended FDI policy, a mandatory prior government approval will now be required for any foreign investment in or acquisition/transfer of an Indian company (directly or indirectly), where the acquirer or beneficial owner of such investment is based out of a country which shares land borders with India. It may be helpful to note that the newly introduced restrictions do not prohibit foreign investment from bordering countries into India but only seek to regulate future foreign investments into India or transfer of existing Indian investments to beneficial owners located in bordering countries. Among the border countries, China is the only land neighbouring country of India who makes substantial foreign investments into India. The legal amendments and details on operational modalities are yet to be notified by the Indian government. In this update, we discuss some key takeaways and potential implications from this revised FDI policy.

What is the change?

Under the Indian FDI framework, a non-resident entity is allowed to invest in all sectors except certain prohibited sectors (such as tobacco, lottery and atomic energy). The FDI policy generally allows foreign investors (except for investors based out of Pakistan and Bangladesh who need to obtain prior government approval) to make foreign investment in most sectors under the automatic route (i.e. without government approval) subject to sectoral conditions.

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