Additional Amendments to Foreign Exchange Management Rules (Non-Debt Instruments) – Government, Public Sector

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India: Additional Amendments to Foreign Exchange Management Rules (Non-Debt Instruments)

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Introduction:

On December 8, 2020, the Ministry of Finance, Government of India notified the Foreign Exchange (Non-Debt Instruments) (Fourth Amendment) Rules 2020 (NDI Amendment Rules). NDI’s amending rules (i) notified the increase of the sector cap for foreign direct investment (FDI) in the defense sector to 74%; and (ii) provided some clarifications on the current policy on investment from countries sharing land borders with India.

Below we have analyzed the amendments to the Foreign Exchange (Non-Debt Instruments) Rules, 2019 (NDI Rules) through the NDI Amending Rules.

To analyse:

  • FDI from multilateral banks/funds: The DPIIT, through Press Note 3 (2020 Series) dated 17 April 2020 (PN 3), had introduced certain protectionist measures against investments from countries sharing land borders with India. Given the PN 3 restrictions, government approval is required for primary and secondary acquisitions by non-resident entities or entities whose beneficial owners belong to countries sharing land borders with India. Our previous updates on this development can be read here. The above requirements were also incorporated into the NDI rules effective April 22, 2020.

  • FDI from banks/multilateral funds: The DPIIT, through Press Note 3 (2020 Series) dated 17 April 2020 (PN 3), had introduced certain protectionist measures against investments from countries sharing land borders with India. Given the PN 3 restrictions, government approval is required for primary and secondary acquisitions by non-resident entities or entities whose beneficial owners belong to countries sharing land borders with India. Our previous updates on this development can be read here. The above requirements were also incorporated into the NDI rules effective April 22, 2020.

    However, neither NP 3 nor the NDI rules specify the nature of the investors covered by its scope or the thresholds for beneficial ownership, which has led to uncertainty and confusion. In addition, in July 2020, the government revised its public procurement policy to notify changes to general financial rules, and entities in neighboring countries, before participating in public procurement and providing goods and/or services. government, were required to obtain registration with the DPIIT. By amending the general financial rules to impose restrictions on public procurement, the DPIIT is empowered to reject or cancel the registration of a bidding entity without giving reasons.

    The NDI Amendment Rules now clarify an aspect that multilateral banks or funds, of which India is a member, will not be subject to the restrictions imposed by PN3, regardless of neighboring nations also holding such memberships.

comments

The changes implemented by the NDI Amendment are certainly significant. However, the investment community hoped for more clarity on aspects such as percentage of beneficial ownership, type of investments, special treatment for non-sensitive sectors or existing investors, unilateral power to reject or cancel registration of a bidding entity, etc. These clarifications would certainly reduce the number of applications currently awaiting approval from the government.

The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected]

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