COVID-19 crisis inspires global tightening of Foreign Investment Screening

Global Publication June 30, 2021

Foreign investment in India is governed by the Foreign Exchange Management Act, 1999 and the rules and regulations thereunder (FEMA), including the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (as amended from time to time) (NDI Rules).

On April 17, 2020, the Ministry of Commerce, Government of India issued Press Note 3 (2020 Series) (PN 3/20) amending the then extant Foreign Direct Investment Policy (FDI Policy). The concomitant amendments made to the NDI Rules (NDI Amendment Rules) pursuant to PN 3/20 came into effect on April 22, 2020. Related amendments have also been made to the FDI Policy on October 15, 2020.

The NDI Amendment Rules, read with PN 3/20, expand the scope of previous restrictions applicable to investors from Bangladesh and Pakistan. The NDI Amendment Rules provide that the prior approval of the Government of India is required (i) for any investment in an entity in India by an investor of a country sharing land border with India or where the beneficial owner of an investment into India is situated in or a citizen of any such country, and/or (ii) for transfer of ownership of any existing or future foreign investment in an Indian entity, directly or indirectly, which results in the beneficial ownership falling within the purview of (i) above.

Consequently, investments from China, Nepal, Myanmar, Bhutan and Afghanistan, in addition to Bangladesh and Pakistan (countries that share land border with India) in India, are subject to the prior approval of the Government of India. This requirement includes indirect acquisitions/changes in shareholding or beneficial interest of an Indian company.

Under a notification dated December 8, 2020 (NDI Further Amendment Rules), it has been clarified that investments by Multilateral Banks or Funds of which India is a member are not covered by the aforesaid regime.

Key aspects under this regime which should be analyzed, with respect to investments in India from any of the aforementioned countries (not being Multilateral Banks or Funds, of which India is a member) are as follows:

  1. The amendments seem to cover follow-on investments by investors from these bordering countries in those Indian companies in which they are already invested.
  2. The amendments seem to apply to investments not leading to a change in the existing shareholding of the foreign investor from a bordering country in the Indian company or where such investment is in exercise of an existing shareholder right/obligation.
  3. Any investments in India through a fund sponsored and/or beneficially owned by investors resident of such country will require approval.
  4. Investments from countries related to China, such as Hong Kong, Macau and Taiwan, are likely to be covered within these amendments.
  5. Given that the terms “beneficial owner” and “beneficial ownership” used in PN 3/20 and in the NDI Amendment Rules are not defined either in the FDI Policy (though used therein) or in the NDI Rules, the meaning of these terms will have to be determined as per the other statutes such as (Indian) Companies Act, 2013, until the Government of India issues a clarification in this regard.
  6. An acquisition of a foreign entity by an investor from China, which, upon completion, will result in an indirect acquisition/change in shareholding resulting in acquisition of beneficial interest of an Indian company, will also be covered by these amendments. 
  7. Whether acquisition of shares by an investor from the aforementioned countries in a foreign listed company which holds shares in an Indian company will be impacted by these amendments. This would depend on the facts of each case. An investor (in that foreign listed company) without any special rights cannot be said to be in a position of holding the beneficial ownership of the Indian company through that listed company. If however the investor itself is in control of that listed company or if he has certain special rights in the listed company (for example, special dividend rights or affirmative voting rights or management rights of such nature that indirectly give that investor the beneficial ownership of the Indian company), then the amendments will apply to his investment, irrespective of his shareholding, in the foreign listed company.

Although seven countries share land borders with India, the impact of these amendments is most significant on investments from China and Taiwan. It remains to be seen if these amendments will be reversed after the COVID-19 pandemic.

Mr. Sandeep Mehta, Partner, J. Sagar Associates, Mumbai, India ( 

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