The unequivocal lockdown declared by the Government of India towards the end of March 2020 is primarily considered to be the most potential and effective preventive measure against COVID-19. However, everything has its own cost and in the present case, where India is undergoing economic slowdown, which may make many Indian corporates an easy target for acquisition by foreign entities.

Thus, in order to curb this opportunistic or the price advantageous takeovers in the time of worldwide catastrophe, the Ministry of Commerce and Industries, Government of India has came up withPress Note 3 (2020 series) dated April 17, 2020 which seeks to bring in stricter measures for foreign investment in India, unlike the previous years, which have progressively witnessed the liberalized measures for foreign investments.The Government has taken this step in consistence with the practice adopted by the other jurisdictions like European Union, Australia, etc.

The key to get the approval of the Government of India, is the fair dealing and fair pricing. For instance, one of factor is that the proposed investment or the acquisition should be at the fair price i.e. atleast the price prevailing prior to the COVID-19 impact on India.

Amended Provision for foreign investments

Under the revised framework, any investment in India from the following shall entail Government's approval:

• 1. Entity based in a country which shares land border with India; or
• 2. Beneficial owner of investment is situated or is a citizen of such country.

Likewise shall be applicable for transfer of ownership of an Indian entity, directly or indirectly in favour of the restricted persons mentioned above. Previously, only Pakistan and Bangladesh were in such stringent purview. But now 7 countries are in the mandatory approval zone, including Bhutan, Nepal, Myanmar, Afghanistan and China (in addition to Pakistan and Bangladesh).

The provisions have been notified vide Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2019 in the Official Gazette on April 22, 2020 by the Department of Economic Affairs, Ministry of Finance.

Government Restrictive Actions and Impact

This move is likely to restrict and hold the future price advantageousinvestments and opportunistic takeovers from China, where it is seen the rise in the making opportunistic investments during this time. The revised directions are a result of growing apprehensions about the Chinese entities taking over or acquiring Indian entities facing economic stress caused by COVID-19 outbreak.

Now, this would be having the major impact on not only the proposed investments including the setting up of new entities but also on the existing investment structures, where China has investments. In the manner:

• many of Indian start-ups including BigBasket, Make My Trip, Zomato and Swiggy have raised large funds from Chinese investors. By virtue of the amended provision, these companies will now see a regulatory intervention for fundraising activities in their future endeavours from such investors;
• further, the Government has not demarcated between the sectors, which means that any investment from the restricted countries in any sector shall be under the scrutiny of the Government;
• the usage of the term "investment" in the press release for the restrictions, the Government has amplified its supervisory powers by impliedly including every form of investment, whether direct or indirect, primary or secondary in its arena of assessment.
• the existing contracts which requires specific performance from the parties by way of selling the shares of an Indian entity or issue of the shares to Chinese investors or to entities whose beneficial holding are held by Chinese citizens (or any other investor from restricted territory) will also come under the approval mode;
• the green field investments, i.e. the setting up or incorporation of new companies will also be facing the required scrutiny;
• acquisition of an entity located in a foreign jurisdiction by China or other neighboring countries, having existing investments in India.

The amended provision, which is prospective in nature, is a test by virtue of which any potential investment for acquisition or set up or transfer of ownershipfrom neighboring jurisdiction China, will pass through the eyes of the Government to review the same taking into consideration the bonafide of the transaction, fair price investment and the interest of economy as a whole. This shall give a chance to the Government to prevent the price advantageous or hostile or opportunistic takeovers being faced by the Indian entities at the time of distressed economy owing to COVID-19 pandemic.

Fair Dealing is a Key

We see fair dealing in the pricing will be the key to pass through the Government Approval process, i.e. where the government is satisfied that no undue benefit is obtained out of the stressed situation occurred due to the COVID-19. This fair dealing may be established through various factors, where one of the factors is undertaking the investment at the price not below the price at which any acquisition or investment transaction happened in the investee entity immediately prior to the COVID-19 or the lockdown situation. The other factors subjective to the investment would also be significantly considered.

Further Clarifications

The Government has acted proactively by issuance of the revised norms, but there are certain issues, which were required to be addressed simultaneously.

Beneficial Ownership and size of Investments

The term "Beneficial Owner" as used in the press note 3 and the NDI Amendment rules has its very wide coverage to include every form of investment, like to even the one with single share, where the beneficial ownership (either direct or indirect) will lie with any person from China or other neighboring countries of India. This requires determination of the beneficial ownership and also the size of the investments, which may get the pass through from the required approvals, from the Government of India. For instance, small or immaterial investment (based upon the size and quantum of acquisition), setting up of new business entities not involving any further acquisitions, may be clarified by the Government for such pass through. However, the decision of the Government will solely be based upon the interest of the Indian economy as a whole.

Thus the clear guidelines for investments from an entity having beneficial owners from persons form China or other restricted regions are expected.

HonKong to consider part of China?

Hong Kong is a special administrative region in South China that enjoys a measure of autonomy under a "one country, two systems" policy agreed at the time of its 1997 handover from Britain. Further, India has a separate tax treaty with Hong Kong, which is in addition to China. Therefore, it may be inferred that Hong Kong enjoys a separate autonomous structure. However, in the absence of any specific exclusion in the press release and its extensive scope applying to the countries sharing land borders with India, Hong Kong should be treated as part of China for the current purpose.

Thus, in the coming times, elucidation on these issues may be expected from the Government to address the practical difficulties faced by the Indian entities.

Approval Process

The term "Government's Approval" here means the approval of the competent authorities as mentioned in the Standard Operating Procedures issued by Department for Promotion of Industry and Internal Trade (DPIIT) (earlier known as Department of Industrial Policy and Promotion) on abolition of Foreign Investment Promotion Board (FIPB) in the year 2017.

The application for obtaining the Government's approval will be filed online on the revamped FIPB portal, rechristened as Foreign Investment Facilitation Portal in the prescribed format and required documents. DPIIT will identify the concerned Administrative Ministry/Department and e-transfer the proposal to the concerned Administrative Ministry/Department (Competent Authority), which will be further scrutinized and final directions may be issued and communicated within an expected period of 6-8 months from the receipt of application by the DPIIT.