Indian Cabinet, chaired by PM, approves alterations in FDI guidelines

Indian Cabinet, chaired by PM, approves alterations in FDI guidelines

It will help countries sharing land borders with India

The Union Council of Ministers, chaired by Prime Minister Shri Narendra Modi, has consented to changes in the Foreign Direct Investment (FDI) policy to provide a final timeline for investments in critical sectors requiring approval.

The amendments are aimed at facilitating foreign capital for startups and deep techs, so that the ease of doing business is improved. It will mean taking expeditious decisions (within 60 days) to assist companies, entering into collaborations, to expand manufacturing in India, and a 60-days approval timeline to help them enter into joint ventures to access technologies and integrate with global supply chains.

This will be beneficial for investments from Land Bordering Countries (LBCs) that manufacture electronic components, capital goods and solar cells.

The amendments are:

1) Incorporation of the definition and criteria for the determination of ‘Beneficial Ownership’ (BO), widely used by the investing community, under the Prevention of Money Laundering Rules, 2005. The BO test will apply at the investor entity level. Investors with non-controlling LBC BO of up to 10 percent will be allowed under the automatic route as per the applicable sectoral caps, entry routes, and attendant conditions. Such investments will be subject to reporting relevant information by the investee entity to the Department for Promotion of Industry and Internal Trade (DPIIT).

2) Expedited clearance of investments in specific sectors, including manufacturing in capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer, to be processed and decided within 60 days. The Committee of Secretaries (CoS) under the Cabinet Secretary will also revise the list of specified sectors. The majority shareholding and control of the Investee entity will at all times be with the resident Indian citizen(s) and/or resident Indian entity(ies) owned and controlled by resident Indian citizen(s).

After the Covid-19 pandemic, vide the 17.04.2020 note, the government amended the extant FDI Policy to curb opportunistic acquisitions of Indian companies. Pursuant to that, an entity of a country sharing the land border with India or where the beneficial owner of an investment into India was situated/was a citizen of any such country, could invest only under the Government route.

Additionally, the transfer of ownership of any existing or future FDI in an entity in India, resulting in the beneficial ownership falling within the aforesaid jurisdiction(s), also requires approval of the government. Also, the applicability of the restrictions to cases where LBC investors may have only non-strategic, non-controlling interests was seen as adversely affecting investment flows from investors, including global funds such as Private Equity/Venture Capital.

The government hopes that the amendments will not only provide clarity and ease of doing business in India, but also contribute towards greater FDI inflows, access to new technologies, domestic value addition, expansion of domestic firms and integration with the global supply chain.

The initiatives will help in leveraging and enhancing the country's competitiveness as a preferred investment and manufacturing destination under the Atmanirbhar Bharat (self-reliant India) campaign.