India’s FDI changes & Prior Approval Process

Corporate & Commercial | Apr 2020 | Dipti Lavya Swain

Prior Approval process introduced

Recently, on 22 April 2020, the Government of India (GOI) amended India’s foreign exchange control norms to require that investments emanating from countries sharing a land border with India (including any beneficial ownership held in such countries) will require prior approval of the Government. The list of such countries includes China and covers investments made through any mechanism including fresh capital infusions as well as purchase of existing security. Prior to this amendment, investments from China did not require any prior approval process.

It must be noted that these amendments do not prohibit Chinese investments into India. Since these amendments, the GOI through it’s Foreign Investment Facilitation Portal (FIFP) has also modified the mechanism as well as the application form for seeking the prior approval of the GOI. While further clarity is still awaited, below is a very quick brief of this new mechanism introduced so far.

Changes in the Application Form to be filed online

A prior approval of the GOI for foreign investment into India has to be routed through the filing of an application form/ proposal online on the website of FIFP, where various details have to be provided and which facilitates a single window clearance system for this purpose. Once successfully uploaded, the application is forwarded to the relevant ministry of the GOI for its approval. This approval system has undergone some minor tweaks considering the amendments pursuant to the recent amendments:

  • Unlike the method existing prior to the above amendments, an applicant is now required to compulsorily select if the proposal falls within the purview of the recent amendments (Para 3.1.1(a) of the Press Note 3 of 2020).
  • The application is also required to select an appropriate “reason for proposal”. While this tab enlists all provisions of the FDI policy that require the prior approval of the GOI (for e.g. proposed foreign investment in a sector that requires approval, investor is a resident of Bangladesh or Pakistan, transfer of shares, expansion of existing facilities/ wholesale to retain, etc.), however, it does not provide any specific option for “investor is a resident of any other country that shares a land border with India” (this includes China). There could possibly be a change to this process in the coming days.
  • Under the tab concerning the details of the Investor, the applicant is required to provide details such as country of residence (in which China is one of the options in the dropdown – although this is a general list of all countries). Additionally, the applicant is required to provide details of “beneficial owner” and “beneficial owner country”.

Changes in the Security Clearance Form

Pursuant to the said amendments, the format of the security clearance form now requires a self-declaration regarding presence or operations in China (this is in addition to the existing list mentioning Pakistan and Bangladesh). The updated security clearance form does not consider self-declarations from other countries sharing land borders with India (namely, Afghanistan, Nepal, Bhutan, Myanmar).

Next Steps

We have been in engagement with the appropriate departments of the Government of India regarding developments in this area. We understand that certain clarification may be brought about by the GOI although dates for the same are unknown at this stage.

As a part of our Client Outreach Program, we shall keep you posted on further updates. In the meantime, please do not hesitate to reach out to us for any clarification and we will be happy to help.