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In a welcome move, the Government of India has approved amendments to the extant Foreign Direct Investment policy (“Policy”) aimed at easing investments from land border sharing countries (“LBC”).
Under the erstwhile Policy framework, any investment into India by an entity incorporated in an LBC, or any investment into India where the beneficial owner is located in or is a citizen of such a country, could be made only through the Government approval route. This restriction was introduced in 2020 as a safeguard against opportunistic takeovers or acquisitions of Indian companies in light of the COVID-19 pandemic.
The Union Cabinet has now revised the Policy and introduced a defined ‘Beneficial Ownership’ test to be applicable to the investor entities. The applicable thresholds align with the definition of beneficial ownership under the Prevention of Money Laundering Rules, 2005. In terms of the revised Policy, investors from LBCs, with non-controlling Beneficial Ownership of up to 10% shall now be permitted to invest in India in accordance with applicable sectoral caps, prescribed entry routes, and other attendant conditions as prescribed under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Such investments shall also be subject to reporting of relevant information by the investee entity to the Department for Promotion of Industry and Internal Trade.
Further, the revised Policy introduces a fast-track approval mechanism for certain investments from LBCs. Proposals for LBC investments in specified manufacturing sectors namely - capital goods, electronic capital goods, electronic components and polysilicon and ingotwafer will now be processed and decided within 60 days, thereby expediting the investment process in capital-intensive and technology heavy segments that are critical to strengthening India’s manufacturing ecosystem and supply chain capabilities. The Committee of Secretaries under the Cabinet Secretary has been empowered to modify the aforementioned list from time to time.
Furthermore, the revision also requires that in such cases of LBC investment, the majority shareholding and control of the investee entity must remain with the resident Indian citizens and/or resident Indian entities owned and controlled by resident Indian citizens at all times.
Overall, the Policy revision is expected to promote ease of doing business in India while maintaining appropriate safeguards. By allowing investments from LBC investors with non-strategic and non-controlling stakes, the Government aims to facilitate greater foreign capital inflows while preserving national economic and strategic interests.