April 18, 2023

Foreign Direct Investment (FDI) from Border Land sharing countries| SOP of obtaining Approval

Foreign Direct Investment represents investment from residents of foreign countries into the business of domestic countries. Through FDI, residents of one country obtain control over the business entities of another country. Therefore, the government keeps on monitoring norms related to FDI to ensure that control in no important sector is obtained by any foreign residents.

As per FDI policies, FDI can be received either through an automatic approval route or Government Approval Route depending upon the sector in which FDI is received. However, there are certain prohibited sectors where FDI can’t be made.

In 2020 (during the COVID-19 pandemic), many investors from China tried to make an opportunistic takeover of Indian Companies due to the Financial crisis of COVID-19. In order to curb this opportunistic takeover, FDI from countries that share land borders with India was brought under the government approval route through Press Note No. 3 (2020 Series).

We have list out the provisions related FDI from borderland Sharing countries and the Standard Operating Procedure (SOP) of doing the same.

1. Position of FDI from Land Border Sharing countries prior to 2020

Till 2019, a non-resident entity can invest in India subject to FDI policies except in those sectors where FDI is prohibited such as atomic energy generation, Chit Funds, Lottery business, etc.
However, a citizen of Bangladesh or Pakistan or an entity incorporated in Bangladesh or Pakistan can invest only under the Government route other than defense, space, atomic energy, and sectors/activities prohibited for foreign investment.

2. Revised Position from 2020 Onwards

Government of India has reviewed FDI policies for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.
As per revised FDI policies, any entity based out in a country that shares land border with India or where the beneficial owner of an investment is situated in or is a citizen of any such country, then such investment can be made only under the Government route.
Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest only under the Government route. However, no investment can be made in prohibited sectors such as defense, space, atomic energy etc.
In case of transfer of ownership of any existing FDI and new beneficial owner is situated in land border sharing countries then such subsequent change in beneficial ownership will also require Government approval.
Rule 6(a) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) was amended to give effect to Press Note No. 3.

3. Standard Operating Procedure of obtaining Government Approval

As per standard Operating procedure (SOP) for processing FDI proposals issued by government on 9th November, 2020, following is the process of obtaining government approval for FDI:

a. Online Filing of Application on National Single Window System (NSWS)

Earlier, Application for obtaining approval of Government for FDI was required to be file online through the Foreign Investment Facilitation Portal (FIFP).
To simplify the approval process of FDI and to promote ease of doing business, instead of filing different approvals related application on different portal, government has created a single window to get all the approvals required to start business in India.
With effect from 5th August, 2022, the government commenced a new single window system where all FDI related approvals can be obtained. New single window can be access at https://www.nsws.gov.in/.
Applications can be filed under the “All Approval” tab under “Central Approvals” available on Dashboard.

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As on date, government provided 587 central approvals through NSWS portal.
Application for FDI approval can be filed under the “Foreign Investment Approval” tab.

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b. Documents required to upload along with applicable

The onus of compliance of provisions of the FDI Policy are on the investee company. While filing application for FDI approval, the investee entity has to upload following documents, as applicable:

Certificate of Incorporation (CoI) of the Investee & Investor Companies/ Entities (Mandatory)
Memorandum of Association (MoA) of the Investee & Investor Companies/ Entities (Mandatory)
Board Resolution of the Investee & Investor Companies/Entities (Mandatory)
Audited Financial Statement of Last Financial Year of the Investee & Investor Companies/Entities (Mandatory)
Article of Association (AoA) of the Investee & Investor Companies/Entities (Mandatory)
List of Names and addresses of all foreign investors/collaborators along with Passport Copy/ Identification Proof of the Investor Company/Entity (Mandatory)
Details of ownership and control of Investee & Investor Companies/ Entities. Details of significant beneficial owners of the Investee & Investor Entities (Mandatory)
Diagrammatic representation of the flow and funds from the original investor to the investee company and Pre and Post shareholding pattern of the Investee Company (Mandatory)
Affidavit stating that all information provided in hard copy and online are the same and correct (Mandatory)
Signed executed copy(ies) of the Investment Agreement/JV agreement/ shareholders agreement/ share transfer agreement/ technology transfer/ trademark/ brand assignment agreement (as applicable), in case there are existing ventures
Board resolution of any joint venture company
Certificates of Incorporation and charter documents of any joint venture/ company which is a party to the proposed transaction
Copy(ies) of reporting compliances in respect of Downstream Investment(s)
Copy of relevant past Government/FIPB/SIA/RBI approvals
Copy(ies) of Foreign Inward Remittance Certificate(s) (FIRCs) along with relevant reporting forms in cases of post-facto approval and cases involving existing/past foreign investment(s)
In the cases of investments by entities which themselves are pooled investment funds, the details such as names and addresses of promoters, investment managers, trustee as well as all the sponsors of the investment fund.
List of the existing/ proposed downstream investment(s) by the Indian Investee entity along with the details of the sector(s)/activity(ies) of such downstream entity(ies). The details of shareholding/capital contribution by the Indian Investee entity in such downstream entity(ies)
Approval(s) of NCLT/competent authority in respect of proposals involving mergers/ demergers/ amalgamations as applicable and required under Companies Act, 2013 and rules thereunder and/or any other rules/ regulations.
Valuation certificate as required in the FDI Policy and FEM Non-Debt Instrument Rules 2019 and the same should be on arm’s length basis.
Non-compete clause certificate of the investor and investee company in case of investment in pharmaceutical sector (As per Annexure 10 of FDI Policy), and as amended from time to time.
Certificate of statutory auditors as mandated in the FDI Policy, as applicable.
Letter of authorization by the applicant in favour of the person(s) filing the application.
Filled-in Security Clearance Form available at FIFP where security clearance of MHA is required.

[Note: In case documents provided by the applicant are in foreign language then the said document/ language should be apostilled and translated into English language.]

c. Marking Application to the respective competent authority

On receipt of application, DPIIT will identify the concerned Administrative Ministry/ Department and e-transfer the proposal within 2 days to the concerned Competent Authority for further processing.
In case of digitally signed applications, the applicant is not required to submit any physical copy with the Competent Authority.
However, in case of applications not digitally signed, DPIIT would inform the applicant through online communication to submit one signed physical copy of the proposal to the Competent Authority.
Applicant is required to submit the signed physical copy of the application within 7 days of communication. The Competent authority may provide additional 7 days to submit the physical copy of the application.
However, if signed physical copy of the application is not submitted within 14 days of the initial communication then the proposal would be treated as closed.
For computing time limit for disposal of applications, following dates shall be considered
- date of filing online application would be considered.
- If a signed physical copy of the application is not filed within 7 days of communication then the date of filing of the physical application would be reckoned as the reference date for calculation of time limits.

d. Procedure for Processing of Applications Seeking Approval for Foreign Investment

i. Application sharing with other Ministries for examination and certain clearances

Once a proposal is received, same shall be circulated to the following authorities:
- Reserve bank of India, within 2 days for comments from the perspective of Foreign Exchange Management Act, 1999 and rules/regulations thereunder.
- Ministry of Home Affairs (MHA) for comments where FDI requires security clearance.
- All proposals would be forwarded to the Ministry of External Affairs (MEA) for information. MEA may give their comments within the stipulated time period, wherever necessary.

All comments will be given directly to the concerned Administrative Ministry/Department.
FDI from Border Land sharing countries or where beneficial owner is situated in or a resident of such countries would require security clearance from MHA.

ii. Clarification on issues

Specific issues for which clarification is required from the point of view of FDI Policy may be referred to DPIIT for clarification with the approval of the Secretary of the Competent Authority.
DPIIT will provide clarification within 2 weeks on such issues.

iii. Consultation with other ministries and Departments

Consultation with any other Ministry/Department will require full justification and approval of the Secretary of the competent Authority/
Further, in order to take appropriate decision on delayed FDI proposals and those escalated by the processing Ministry/Department concerned for quicker disposal, an inter-ministerial committee has been constituted, consisting of Secretaries from Department for Promotion of Industry and Internal Trade, Department of Economic Affairs, Ministry of Corporate Affairs, Ministry of Home Affairs, concerned administrative Ministry/ Department and representatives from RBI and NITI Aayog to examine and guide the concerned Administrative Ministry/department to process such proposals for timely disposal.
Ministries/ Departments consulted shall upload their comments within 4 weeks from the online receipt of the proposal.
If no comments are received within the stipulated time then it would be presumed that they have no comments to offer.
Comments by MHA on proposals for investment in sectors requiring security clearance would be provided to the Competent Authority within 6 weeks from the online receipt of such proposals.
In cases where MHA is not in a position to provide its comments, it will intimate the concerned administrative Ministry/Department of the expected time frame within which MHA would be able to give its comments.

iv. Submission of Additional Documents or information, if required

The Competent Authority shall scrutinize the proposal and attached documents within 1 week and may also ask the applicant for some additional information or documents.
All such queries shall be made online/emailed to the applicant so as to avoid delay.
The Applicant is required to submit within 1 week. Such period may be further extended by 7 days. After expiry of additional 7 days, a final reminder may be issued to the applicant to provide the information in seven 7 days.
In case of non receipt of clarification, the competent authorities shall close the application due to incomplete/inadequate information/documents from the applicant.
In computing the time limit of disposing of proposal, time taken by the applicant in addressing the queries will be excluded.

v. Processing of application by Competent Authority

While examining the proposals, adequate care has to be exercised keeping in view the FDI Policy, Press Notes, FEMA/RBI Notifications/Guidelines issued from time to time.
The Competent Authority should take into consideration the sectoral requirements and the sectoral policies vis-à-vis the proposals.
Once the proposal is complete in all respects, which should not be later than 6-8 weeks (8 weeks in cases where comments of MHA have been sought from security clearance point of view) from the receipt of the proposal, the Competent Authority shall process the proposal for decision and convey the same to the applicant within next 4 weeks.
Approval/ rejection letters will be sent online by the Competent Authority to the applicant, consulted Ministries and Departments and DPIIT.
Where equity inflow is more than Rs 5,000 crore, Competent Authority shall place application before Cabinet Committee on Economic Affairs (CCEA) for consideration within the above timelines. After the receipt of the decision of CCEA, letter conveying decision shall be issued within 1 week.

vi. Process in case of rejected application

In case of proposals rejected by competent authority or in cases where conditions for approval are stipulated in addition to the conditions laid down in the FDI Policy or sectoral laws/regulations, concurrence of DPIIT shall compulsorily be sought by the Competent Authority within 10 weeks ( 12 weeks in cases where comments of MHA have been sought from security clearance point of view) from the receipt of the proposal.
The following may be noted by all administrative Ministries/ Departments:

FDI application is incomplete (due to non submission of additional documents or due to non submission of signed copy):

In such cases, concurrence of DPIIT is not required for closure of the proposal.
However, prior concurrence of DPIIT is required for rejecting the proposal after the applicant has submitted all necessary documents and the administrative Ministry/ Department, after examining the proposal, proposes to reject it.
Please note that closure of FDI application will not amount to its rejection and is without prejudice to the applicant re-applying with all requisite documents.
While closing the FDI applications, the applicant may be advised to apply afresh along with all requisite documents, if they so wish.

Wherein the FDI proposal seeks an amendment of an earlier Government/FIPB approval, concurrence of DPIIT is being sought to reject such amendment applications and to ask the applicant to file a fresh application:

In such cases, the applicant should not be asked to apply afresh, as all information about them except the amendment request and details connected thereto, are already withconcerned Ministry/Department.
An application filed through FIFP seeking amendment(s) to earlier approvals is to be considered as a valid application and this does not require a fresh application.

Wherein NCLT/competent authority is yet to approve the scheme in respect of acquisition of shares under Scheme of Merger/Demerger/ Amalgamation and concurrence of DPIIT is being sought to reject the application:

From the foreign investment regulatory perspective, the acquisition of shares under scheme of mergers/demergers/ amalgamations of companies in India are laid down in Para 4 of Annexure-4 under the FDI Policy and Rule 19 of FEM Non-Debt Instrument Rules 2019.
It may be noted that approval of NCLT/competent authority, as applicable, is a necessary pre-condition for issuance of shares consequent to a merger or amalgamation of two or more Indian companies or a reconstruction by way of demerger or otherwise of an Indiancompany.
Therefore, with regard to proposals involving mergers/ demergers/ amalgamations of companies in India, approval(s) of NCLT/competent authority as applicable and required under Companies Act, 2013 and rules thereunder and/or any other rules/regulations, needs to be obtained before the grant of FDI approval in such cases.
In case the relevant approval(s) of NCLT/competent authority is not available, the applicant may be advised to resubmit the application along with requisite approval(s), when available. Till then, the application may be treated as closed.

vii. Other Process

DPIIT and each of the Competent Authorities shall maintain a database of proposals received along with details such as date of receipt, investor and investee company details, volume of foreign investment involved, and date of grant of approval/rejection letter.

e. Surrender of Approval obtained earlier

If an applicant proposes to surrender an approval letter granted to the investee entity/investor, then the concerned administrative Ministry/Department may accept the withdrawal only after submission of reasons of withdrawal/Surrender.
An acknowledgement in this regard has to be sent to the applicant clearly indicating the date from which the approval letter stands withdrawn.
A copy of the same should be marked to all the Government agencies/Regulators to which the original approval letter was marked.
An applicant may also withdraw its FDI proposal, pending for decision, subject to submission of reasons for such withdrawal addressed to the Competent Authority with a copy to DPIIT.
However, subject to the preceding provisions on withdrawal of the approval letter, an applicant is not permitted to withdraw its FDI proposal after the decision is taken by Competent Authority on the FDI proposal.

f. Compounding of Contraventions:

FDI is a capital account transaction and thus any violation of FDI regulations is covered by the penal provisions of FEMA.
Section 15 of FEMA permits compounding of contraventions and lays down the basic framework for the compounding process.
Administrative Ministries/ Departments are advised to refer to the Master Direction- Compounding of Contraventions under FEMA, 1999 FED Master Direction No.4/2015-16 issued by the RBI, as amended from time to time.

4. Timit of Processing of Application

Action Point	Time Period	Cumulative Period
Dissemination of proposal by DPIIT to the Concerned Ministry/ Department	2 days	1 week
Time for submission of signed physical copy of the proposal from the date of online submission by applicant to the Competent Authority, if needed	1 week	1 week
Initial scrutiny of the proposal and documents, and seeking relevant additional information/documents from the applicant	1 week	2 weeks
Time limit for submission of clarification by DPIIT on specific issues of FDI Policy	2 weeks	4 weeks
Time limit for submission of comments by consulted Ministry/ Department/ RBI/ Regulator/any Other Stakeholder	4 weeks	6 weeks
Time limit for submission of comments by MHA on proposals requiring security clearance	2 weeks	8 weeks
Time limit for approval on proposals by Competent Authority for grant of approval:Proposals not requiring security clearanceProposal Requiring security clearance	4 weeks	10 weeks12 weeks

6. Monitoring & Review

Competent Authorities will hold a regular monthly review on the foreign investment proposals pending with them.
Regular Review meeting on the pendency of FDI proposals with concerned Administrative Ministry(ies)/ Department(s) would be convened by Secretary, DPIIT, periodically every four 4-6 weeks. The Secretary of the concerned Administrative Ministry/Department may also attend the meeting.
Administrative Ministries/Departments should update the information regarding date of physical receipt of the application and update the decisions taken on the portal.
Administrative Ministries/Departments should furnish a fortnightly report on pending proposals. Also, administrative Ministries/Departments should maintain an updated database of all proposals dealt by them.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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