India

Non-residents investing in India are required to comply with India's Foreign Direct Investment (FDI Policy and other foreign investment and foreign exchange regulations, including the Foreign Exchange Management Act (FEMA) and the regulations and notifications thereunder.¹ The FDI Policy is issued and revised from time to time by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry, Government of India (GOI).

REGULATORY FRAMEWORK

Non-resident investors do not require any prior licensing or registration for foreign direct investment in India. India regulates FDI depending on the sector in which the investment is proposed to be made.

FDI is permitted in most sectors under two routes: the automatic route and the approval route. Under the automatic route, the investment may be made without any approval from any government agency. Examples of sectors under the automatic route include, among others, e-commerce, healthcare, manufacturing and renewable energy. Under the approval route, prior government approval is required for FDI. Sectors under the approval route include, among others, broadcasting, banking, defense, mining, print media and biotechnology. FDI is prohibited in a limited number of sectors such as manufacturing of tobacco, trading in transferrable development rights, real estate business (subject to limited exceptions), and gambling and betting, including casinos.

FDI in certain sectors permitted under either route is also subject to a specified cap and/or conditions. Where a cap is prescribed for a sector, the FDI in any entity in that sector cannot exceed the prescribed cap. The GOI revises the list of sectors under the automatic route, approval route and prohibited category, as well as any caps applicable to FDI in any sectors, on a periodic basis.

On April 18, 2020, via new regulation dubbed "Press Note 3," the GOI added all FDI by non-resident entities of countries that share a land border with India to the approval route, regardless of the sector. Countries that share a border with India include Pakistan, Bangladesh, China, Nepal, Myanmar and Bhutan.

WHO FILES

If FDI is permitted under the approval route, the target company resident in India is required to file the application for approval. The application requires detailed information and documentation about the proposed investment, including incorporation documents and financial documents of the investor, terms of the foreign investment, and other documents required to verify the identity and suitability of the investor and the risks involved in approving the proposed FDI.

The DPIIT processes the applications received under the approval route and coordinates with the relevant ministry or department of the GOI that has the primary responsibility for the relevant sector (the Competent Authority) to jointly review such applications.

TYPES OF DEALS REVIEWED

All investments in sectors under the approval route are reviewed. Proposed investments in certain sectors such as defense, broadcasting and telecommunication also go through an additional layer of security clearance from the Ministry of Home Affairs. And again, all investments from countries that share a land border with India are subject to review by the DPIIT and the Competent Authority.

SCOPE OF REVIEW

The criteria for review are broad, and all aspects of each application are considered part of the review. The government has wide discretion to grant or reject an approval. The DPIIT and Competent Authority consider the reputation of the foreign investor, its history of owning and operating similar investments, national security and the overall impact of the proposed investment on the national interest.

TRENDS IN THE REVIEW PROCESS

The approval process was revamped in 2017 to establish the Foreign Investment Facilitation Portal, which serves as a single window for prospective investors to communicate with the GOI. The DPIIT has been tasked with the responsibility of facilitating FDI. The DPIIT's concurrence is mandatory for a Competent Authority to reject an application or to impose any additional conditions not provided in the FDI Policy or applicable law.

The GOI has not laid out specific criteria for evaluation of investments, and appears to be mainly concerned with national security. With the heightened scrutiny, many ongoing transactions with Chinese investors are being put on hold while awaiting more specific guidance from the GOI on Press Note 3.

REVIEW PROCESS TIMELINE

The DPIIT, along with the relevant Competent Authority, is required to make its decision within eight to ten weeks after receiving an application. A single governmental department relevant to the sector (subject to security clearance, if applicable) identified by the DPIIT is required to take the lead in processing the application.

2020 UPDATE HIGHLIGHTS

The GOI introduced Press Note 3 with a view to curbing "opportunistic takeovers/acquisitions of Indian companies" due to COVID-19, and added the following two additional restrictions:

• An entity of a country that 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 through the approval route
• Government approval will also be required where subsequent changes in "beneficial ownership" (by way of direct or indirect transfers) of any existing or future FDI would result in such beneficial ownership falling within the purview of the first restriction

The most significant effect of Press Note 3 is expected to be on new or follow-on FDI from China. Press Note 3 does not affect existing investments but will affect any changes to such investments after the date of notification of Press Note 3.

Press Note 3 will also affect investors from countries that do not share a land border with India if such investors have direct or indirect beneficial owners situated in a country that shares a land border with

India. This implies that non-Indian entities that have subsidiaries in India and are seeking to raise funds in their own country, or whose shareholders are looking to sell their stakes, will be affected by Press Note 3.

The GOI has not yet provided any guidance regarding the criteria for granting approvals pursuant to Press Note 3 or how beneficial ownership of an entity will be determined.

Authorized dealer banks (which process inbound foreign investments, particularly under the automatic route) are currently requiring investors to make a self-declaration to verify compliance with Press Note 3, and some of them have indicated that beneficial ownership of 10 percent or more in an entity would be subject to restrictions under Press Note 3. Authorized dealer banks have also taken the position that Hong Kong, Macau and Taiwan are treated as part of China, for purposes of Press Note 3.

OUTCOMES

• While the GOI continues to welcome FDI and make it easier to navigate the FDI regime, Press Note 3 has significantly raised hurdles to FDI in India, particularly for FDI from Chinese investors
• Market participants are expecting more clarity from the GOI on how Press Note 3 will be implemented

_{1 FDI by Non-Resident Indians (NRIs) is regulated by separate regulations and this note does not cover such regulations.
2 The indicative timeline can be accessed here}

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