Foreign Direct Investment Regulations

[By Lavanya Chetwani & Shriyansh Singhal] The authors are students of National Law University Odisha.   Introduction The Ministry of Finance through its Department of Economic Affairs has introduced the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (‘Amended Rules’), which signifies a major shift in the regulatory framework in India. The amendments have been issued to somewhat modify the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘Existing Rules’). The announcement in the Union Budget 2024-2025 has led to the introduction of these amended rules.   These changes will enhance India’s legal and regulatory landscape by bringing Indian regulations to align with international standards. A new provision on equity swaps, improved investment regulations, and alterations to some significant definitions are just a few of the important changes made to the rules.   This article examines how the new amendments enable an Indian company to issue or transfer its shares in return for shares from a foreign corporation, facilitating cross-border share exchanges. Altogether, these changes are expected to improve the flow of cross-border M&A deals, help in attracting foreign investments, and allow Indian companies to increase their global footprint effectively.    Interpreting the Amendments (i) Revised Definitions   The amended rules added a new clause, Rule 2(da), which defines ‘control’. According to this provision, the meaning of control is the same as defined in the Companies Act 2013. Section 2(27) defines control as having the power to appoint the majority of directors and exercise control or influence the policy decisions of the company, either directly or indirectly, through shareholding, management rights, voting agreements, or any other means.   Rule 2(da) when applicable to an LLP, defines control as the ability to appoint most of the directors who have the final say in the company’s decisions.   Rule 2(an) of the amended rules has also defined ‘startup company’ as a private company incorporated under the Companies Act 2013 and is identified as a ‘startup’ to make it parallel with the definition given by the Ministry of Commerce and Industry and the Department for Promotion of Industry and Internal Trade.   The objective of bringing the changes is to make the definitions in line with other laws like the Companies Act 2013 and other rules and regulations which several statutory bodies & ministries release from time to time. This ensures consistency in legal frameworks and helps in streamlining regulatory compliance for easier interpretation.    (ii)Refined Rules for improved clarity   The amendments have also brought some clarity over the treatment of downstream investments. The earlier guidelines provided for sectoral caps, prior government approvals and reporting requirements. According to the amended Rule 23(7)(i) explanation, an investment made by an Indian entity that is owned or controlled by non-resident Indians (NRIs), on a non-repatriation basis, would not be taken into account when determining indirect foreign investment (‘IFI’).   Pursuant to this amendment, the investments by entities owned and controlled by OCI(s) will now be treated at par with entities controlled by NRI(s) and will not be considered for the calculation of IFI. It is expected to encourage more OCIs to invest in India through entities owned and controlled by them.   Further, Rule 9(1) Proviso (i) has been amended and it states that for transfer of equity instruments, prior government approval is necessary in all cases where such approval is applicable. Prior to this amendment, approval was necessary if the target company was engaged in a sector that required government approval. Additionally, the amendments have lifted the 49% cap on aggregate foreign portfolio investments, now allowing investments up to the sectoral or statutory cap without needing government approval, provided that such investments do not result in a change of ownership or control of the entity.   A change in the principal rules in Schedule I now permits an Indian company to offer equity instruments to a person residing outside of India in place of a swap of equity capital of a foreign company in compliance to the rules stipulated under the Foreign Exchange Management (Overseas Investment) Rules, 2022 and RBI regulations. These amendments aim to facilitate easier transfer or swap of equity instruments between entities.  All these amendments are directed towards making cross-border swaps easier, expecting that this will lead to more foreign investment in India and will make Indian practices more in line with international practices.  (iii) Addition of rules in relation to equity instruments and equity capital   The introduction of Rule 9A allows the transfer of equity instruments between an Indian resident and a foreign resident through a swap of equity instruments or equity capital. Complying with the rules set by the Central Government and the Reserve Bank of India (‘RBI’) regulations is sine qua non. Strict adherence to the Overseas Investment Rules is required for the swap of equity capital of a foreign company, and Government approval is required in all cases where it is applicable.   Earlier the act did not provide for authorizing swap of equity instruments of an Indian entity with that of a foreign entity. Therefore, by allowing this, the rule encourages more dynamic and flexible investment strategies.  Additions have also been made to Schedule I, where White Label ATM Operations (‘WLAO’) is added to the table of permitted sectors for Foreign Investments. WLA is a term used for ATMs operated by Non-Banking Finance Companies (‘NBFCs’), allowing customers from multiple banks to make various transactions. The cap for foreign investment in this sector is put at 100% and the entry route is Automatic, meaning no government pre-approval is required.   Investors in this sector must meet several requirements. They must have a minimum net worth of hundred crore rupees and comply with minimum capitalization norms if they are involved in other financial services. Additionally, any foreign direct investment in WLAO must adhere to specific criteria and guidelines established by the RBI under the Payment and Settlement Systems Act of 2007.  Decoding the amendments: benefits and drawbacks The amendments will result in the expansion of Indian companies at the global level through mergers, acquisitions, and other strategic initiatives. The new definition

[By Karan Anand] The author is a student of OP Jindal University.   Introduction The recent announcement by ArcelorMittal Nippon Steel (AMNS) India regarding itsambitious expansion plans at the Hazira steel plant presents a compelling juncture to explore the strategic dynamics within India’s steel industry.[1] In a landscape characterized by heightened industrial growth and governmental emphasis on self-reliance, the trajectory of investments in steel production assumes paramount significance. With AMNS India’s noteworthy investment of approximately Rs 60,000 crore towards capacity enhancement and technological modernization, the industry witnesses a confluence of global expertise and indigenous potential. This piece aims to delineate the viability and implications of cross-border mergers in contrast to greenfield investments within India’s steel industry. By leveraging the recent developments at Hazira as a transition point, we delve into the strategic imperatives driving investment decisions and their ramifications on industrial sustainability and national economic objectives. Greenfield and brownfield investment In the case of Greenfield investment, various ancillary regulations become pertinent and applicable because an entity is being created from scratch. Firstly, there exists a multitude of licensesand registrations that are required. These include MSME/SSI registration which is a mandatory registration for a business to start functioning in India, as per the Supreme Court’s judgmentin the case of Silpi Industries v Kerala State Road Transport Corporation.[2]This registration divides industries into Micro, Small and Medium Enterprises based on the amount invested. In addition, GST registration is compulsory for all businesses involved in the sale and purchase of goods in India. The tax slab for the steel industry stands at 18%.[3] Entities entering the Steel industry also need to meet certain environmental regulations, which are set in place by the Ministry of Environmental, Forest and Climate Change (MoEF&CC), EAC (Expert Appraisal Committee) and State PCB (Pollution Control Board).[4] The firm entering the Indian market is also required to identify land parcels and fulfill the requirements that are laid down by the Ministry of Steel. In the event that such land is forested, clearance is also required from the State Forest Department. The governing regulationsfor the same are the Forest (Conservation) Act, 1980[5] and Forest Conservation Rules, 2003.[6] The process of securing necessary clearances thus becomes extremely burdensome for firms, extending over 3-5 years, considering the interests of numerous stakeholders involved in the same. Firms entering the Indian market are also required to comply with the provisions that regulate labour and employment conditions. The Factories Act, 1948,[7] was introduced to regulate the working conditions for labour in factories and workspaces.Any entity setting up a plant must comply with the safety and welfare provisions mentioned in the Act. Such entities must also create a provident fund for employees, for their welfare, medical, maternity and disability benefits and maintain balances in accordance with the State Insurance Act, 1948[8] the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.[9]The case of Hindustan Lever Ltd v Regional Provident Fund Commissioner,[10] laid down that it is the responsibility of the Employer to create a provident fund for employees, and that such compliance is mandatory. In the case of Brownfield investments, while there may not be compliance with regulations for starting a business, there are still authorities that monitor and regulate the effects and mode of such investment. The Indian regime for Merger control, is governed by the Competition Act 2002, the CCI and notifications from the Ministry of Corporate Affairs.[11] The Competition Act mandates the reporting of all combinations that would breach the prescribed asset and turnover threshold, set by the Commission. These thresholds vary based on the value of the assets and turnover of the parties to the combination and are put for review bi-annually as per Section 20(3) of the Act.[12] The motive of the Competition Act is to ensure that such brownfield investments are not anti-competitive. Moreover, the Competition Act also ensures that there is no abuse of dominant position in the market. If the combination pertains to a company that is publicly listed, i.e., listed on a stock exchange, then such a combination may also be subject to Securities Exchange Board of India (SEBI) regulations. One such regulation is the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, more commonly referred to as the Takeover Code.[13]As such the regulations pertaining to acquisitions under the code, being Regulation 3 and 4 must be complied with, and announcements must be made upon the meeting of the trigger requirements in the code as per Regulation 3(2). Comparison from a regulatory standpoint While the mode of investment that a company opts to use, is extremely subjective, it is also possible to deduce an ideal mode of investment based solely on the regulatory framework. This is especially true for the Steel industry; wherein regulatory compliances are not only capital intensive but time intensive as well.[14]One of the major challenges in this regard is the development and identification of land, fit for the construction and development of a plant. The same can be seen in the case of POSCO, a South Korean firm, which was the world’s fourth largest producer of steelthat sought to enter the Indian Steel market in 2005, by setting up a plant in Odisha. The investment, had it gone through would have been the largest Foreign Direct Investment into India at that time. After 12 years of trying, the deal eventually fell through, due to the unavailability of land that met the various regulations set in place.[15]Thus, greenfield investments aredaunting and often take longer to generate returns thancompanies may expect, due to its lengthy regulatory requirements. Conversely, Brownfield investments require fewer regulatory requirements, as the foreign entity buys into or redevelops an existing setup, which has already fulfilled the procedural regulations.4This can be seen in the case of the acquisition of Essar Steel which took place in 2017. ArcelorMittal Nippon Steel India (AM/NS India) has purchased infrastructural assets that provide “strategic advantages” to the joint venture in the steel business. The duo has entered into agreement with Essar Steel to purchase 3 ports, 2 power plants