In a recent note of Department for Promotion of Industry and Internal Trade (“DPIIT”) dated April 17, 2020[1] an amendment to the Consolidated Foreign Direct Investment Policy, 2017 (“FDI Policy”) has been notified. The amendment seeks to prevent opportunistic takeovers or acquisitions of Indian companies by entities located in bordering nations, which might take advantage of the current COVID-19 pandemic.

Events leading to the amendment

After the shutting down of the country to fight the problem of COVID-19, it was observed that China’s central bank which is also known as People’s Bank of China had brought 1.01 per cent of stake in HDFC bank. It was as per the shareholding disclosures for the quarter of March that it was evident that Chinese Central Bank held in a total of 1.75 crore shares of HDFC bank after acquiring additional shares. This was done after the value of shares of HDFC decreased. The value of shares went from Rs. 2,493 to Rs. 1,499.[2] It was this event that raised eyebrows in India and DPIIT came into action to prevent such triggering events for opportunistic takeovers or acquisitions.

Before and After – Tracing the amendment

The earlier Position on FDI by a non-resident entity as per Para 3.1.1 of the FDI Policy was stipulated as:

“A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.”

A new part added as para 3.1.1 (a) now reads as:

“A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.”

In summary, the revised position now states that investment in India by non-resident entities of countries, which share a land border with India that is China, Bangladesh, Pakistan, Nepal, Myanmar, Afghanistan and Bhutan or where the beneficial owner of investment into India is located or is a citizen of any such bordering States, such investments will be permitted only under the Government approval route and not the automatic route.

Opportunistic takeovers, acquisitions and beneficial owner defined

‘Acquisition’ has been defined under Section 2(b) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SEBI Takeover Code”).[3] It provides the definition as:

“Acquisition means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company”

Therefore, acquiring shares or agreeing to acquire shares in order to have control or voting rights in a target company is an acquisition. The definition of “control” is also pertinent in the context of the discussion of the topic. The word “control” has also been defined under the SEBI Takeover Code under Section 2(e) as

“Control  includes the right to appoint the majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner: Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.”

The definition of “takeover” has not been given statutorily anywhere. However, in the frequently asked questions (“FAQ”) on SEBI Takeover Code[4] it has provided a definition of takeover and also provided an explanation as to how it differs from an acquisition. It has been provided as:

“When an acquirer takes over the control of the “Target Company”, it is termed as Takeover. When an acquirer acquires “substantial quantity of shares or voting rights” of the Target Company, it results into substantial acquisition of shares.”

Therefore, looking at these definitions we can figure out the definition of an opportunistic takeover. There is no statutory or case law definition given of an “opportunistic takeover” or “opportunistic acquisition”. Hence, it can be said looking at the situation which led to this amendment that it refers to acquisitions or takeovers which exploit an opportunity wherein the conditions are in favour of the acquirer and such conditions at the same time are against the target company or the external/ internal environment in which the target company is.

The definition of the beneficial owner is also important to discuss. The closest definition could be found under Section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018 mentions the term Significant Beneficial Owner (“SBO”). It states that-

“SBO is an individual who either alone or together with other individuals or trust, exercises rights or entitlements in a company by way of holding 10% shares or 10% voting rights or right to receive 10% or more dividend, both indirect and direct holdings or right was taken together or such individual exercise significant influence or control, indirectly or along with direct holding in the Company.”

Analysis

This step was taken by the government to scrutinize and block investments from China but on a bare reading of the note, it is observed that it may also affect incoming investments from other countries where the beneficial owners plan to or have invested more than 50 % of the capital instruments of an Indian company by the way of Special Purpose Vehicles (“SPV”). The note does not provide a definition of beneficial ownership and the same might have to be filled by Master Direction – Foreign Investment in India (“Master Direction”).[5]  The Master Direction in the provision 9.1.1 provides the definition of “ownership of Indian company” as-

“Ownership of an Indian company’ is the beneficial holding of more than 50 per cent of the capital instruments of such company.”

If a person who is a Chinese citizen has an interest in SPV carried investments, wherein such SPV is in a foreign jurisdiction it may be marked as an indirect investment under the amended provisions.

Regularly, investments in India which are received from bordering states will be done through creating an SPV in tax havens such as Mauritius, Netherlands and other such similar jurisdictions. However, now this step would also require the nod of the Government. Therefore, in summary, approval will be required for

1. All incoming investments through SPV, if there is an element of bordering state, which might result in beneficial ownership.
2. Transferring more than 50% of the capital of any Indian company by the SPV where the beneficial owner is the country from the bordering state.

However, the government has not banned any investment in India by China or Chinese companies through other routes.

In conclusion, this amendment was a quick measure and a remedy that is highly appreciated in the current situation. The quick action taken by DPIIT prevents Indian companies and corporate entities from being exploited in such a sensitive economic situation.

[1] Ministry of Commerce & Industry Department for Promotion of Industry and Internal Trade FDI Policy  Section Press Note No. 3(2020 Series) accessed at https://dipp.gov.in/sites/default/files/pn3_2020.pdf

[2]Economic times China’s Central Bank Buys 1% Stake in HDFC, dated April 13, 2020https://economictimes.indiatimes.com/markets/stocks/news/chinas-central-bank-holds-1-stake-in-hdfc/articleshow/75104998.cms?from=mdr accessed on April 19, 2020.

[3] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 https://www.sebi.gov.in/legal/regulations/apr-2017/sebi-substantial-acquisition-of-shares-and-takeovers-regulations-2011-last-amended-on-march-6-2017-_34693.html accessed on April 19, 2020.

[4]Frequently Asked Questions on SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 https://www.sebi.gov.in/sebi_data/faqfiles/aug-2017/1503313163982.pdf accessed on April 19, 2020.

[5] Master Direction – Foreign Investment in India (Updated up to March 08, 2019)- https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11200 accessed on April 19, 2020.

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ABOUT THE AUTHOR

Jai Bajpai

Jai Bajpai is a final year law student at School of Law, University of Petroleum and Energy Studies, Dehradun.