The Department for Promotion of Industry and Internal Trade (FDI division) (“DPIIT”), Ministry of Commerce and Industry (Government of India), makes policy pronouncements on foreign direct investment in India (“FDI”) through consolidated FDI policy, circular/press notes/press releases which are notified by the Department of Economic Affairs (“DEA”), Ministry of Finance (“MoF”), government of India as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“Non-Debt Instruments Rules”) under the Foreign Exchange Management Act, 1999 (“FEMA”). The Ministry of Commerce and Industry on October 28, 2020 released the latest consolidated FDI policy document (“FDI Policy 2020”) (the previous one was issued in the year 2017). The effective date of the FDI Policy 2020 is October 15, 2020.

1. Purpose of FDI Policy 2020
(a) FDI Policy 2020 subsumes and supersedes all press notes/press releases/ clarifications/ circulars issued by the DPIIT, which were in force as on October 15, 2020 as well as introduced the changes made under the Non-Debt Instruments Rules.

(b) FDI Policy 2020 can be used as ready reckoner for a foreign investor who will get the latest information on all the permissible limits in the sectors, reporting and compliances in one document and don’t have to go through separate press notes issued by DPIIT and the rules and regulations prescribed by Reserve Bank of India (“RBI”) from time to time.

2. Regulatory Framework for Foreign Investment in India
(a) The regulatory framework, over a period of time, consists of FEMA and rules/regulations thereunder, consolidated FDI policy, circular, press notes, press releases, clarifications, etc.

(b) In case of any conflict between the FDI Policy 2020 and the provisions of the Non-Debt Rules or notifications issued thereunder, the provisions of Non-Debt Instruments Rules and notifications thereunder will prevail. The payment of inward remittance and reporting requirements are stipulated under the Foreign Exchange Management (Mode of Payment and Reporting Non-Debt Instruments) Regulations, 2019 issued by the RBI.

3. Grandfathering of FDI prior to October 15, 2020 and impact on the FDI made prior to October 15, 2020
(a) Apart from the foreign investment made by entities or citizens of bordering nations (i.e. FDI which is subject to restriction under Press Note 3(2020) dated April 17, 2020), any foreign investments made prior to October 15, 2020 in accordance with the press notes/press releases/clarifications/circulars and applicable provisions under FEMA and rules/regulations thereunder and effective as on that date, shall be deemed to have been done or taken under the corresponding provisions of the FDI Policy 2020 and shall be valid and effective.


1. Changes in the Definitions:
(a) Warrants : Under the definition of ‘capital’, it is clarified that it includes warrants. Warrants have been explained to include share warrants issued by an Indian company in accordance with the regulations by the Securities Exchange Board of India (“SEBI”) and the provisions of the Companies Act, 2013. [Compliance with regulations prescribed by SEBI in case of issuance of share warrants was not required under the previous FDI Policy of 2017].

(b) Control : The scope of the definition of control has been expanded to include right to control the management or policy decisions, exercisable by a person or persons acting individually or in concert, directly or indirectly. [This definition of ‘control’ has now been aligned with the definition of control as used in the Companies Act, 2013 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.]

(c) Downstream Investment : The definition of a downstream investment is defined to specially include the way i.e. (subscription or acquisition) by which an indirect foreign investment by an eligible Indian entity is invested into another Indian Company/LLP.

2. Investment through ‘capital instruments’ by a person resident outside India

[Note: It appears that classification of an investment in an Indian listed company has been linked to the quantum of investment. However, this can have an unintended consequence on a strategic investor wishing to acquire less than 10% (ten percent) of the share capital of an Indian listed company or willing to acquire more than 10% (ten percent) of the share capital of the Indian listed company in tranches and initially only acquiring less than 10% (ten percent), through the FDI route and not through the Foreign Portfolio Investment (“FPI”) route because of economic or strategic reasons. It needs to be clarified whether strategic investors acquiring less than 10% (ten percent) of the share capital of an Indian listed company (especially through a primary allotment) will be required to obtain a ‘FPI license’ and comply with the provisions of SEBI (Foreign Portfolio Investors) Regulations, 2019.]

3. Limited Liability Partnerships (“LLPs”) allowed to avail the foreign funding
Any investment (by way of capital contribution or acquisition of transfer of profit shares of LLP) made by a person resident outside India on a repatriable basis to the capital of a limited liability partnership is now recognised as valid foreign investment under FDI Policy 2020.

4. Timeline for issuance of securities by the investee Indian company
The capital instruments should be issued within 60 (sixty) days from the date of receipt of the inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NRE/FCNR (B) account of the non-resident investor (the previous FDI policy of 2017 had prescribed 180 days for issuance).

5. Reporting requirements
(a) All the reporting is required to be done through the Single Master Form (“SMF”) available on the Foreign Investment Reporting and Management System (“FIRMS”) platform at https://firms.rbi.org.in. The user manual for reporting is available at https://firms.rbi.org.in/firms/faces/pages/login.xhtml. The format of the SMF and KYC report is available in the user manual.

(b) Reporting to be made within 30 (thirty) days of receipt of money from the foreign investor and the Indian company will report to the Regional Office of RBI under whose jurisdiction its registered office is located.

Reporting requirements in case of secondary investment
(c) Reporting to RBI (through AD-Category I bank) to be made in form FC-TRS, within 60 (sixty) days of transfer of capital instruments or receipt / remittance of funds whichever is earlier. [Under the previous FDI policy of 2017, the reporting in case of secondary investment was to be made within 60 days from the date of receipt of the amount of consideration.]

(d) Transfer of equity instruments on a recognised stock exchange by a person resident outside India shall be reported by such person in Form FC-TRS.

6. For sectors under the automatic route, issue of equity shares against import of capital goods/ machinery/ equipment (excluding second-hand machinery) and pre-operative/pre-incorporation expenses (including payments of rent etc.) is permitted under automatic route subject to compliance with respective conditions prescribed, and reporting to RBI in form FC-GPR as per procedure prescribed under the FDI policy 2020.

7. In relation to e-commerce companies, the changes introduced in the FDI Policy 2020 carries forward the changes in Press Note 2 of 2018, including the requirements of ensuring that such e-commerce companies do not have any equity/control over inventory of the sellers in any manner. [Note: In light of the above, it might be relevant to note a recent development wherein the confederation of All India Traders, recently wrote to the Union Commerce Minister, urging him to prohibit Aditya Birla Fashion and Retails Limited (which intends to raise INR 1,500 crores by issuing 7.8% stake to Walmart-owned Flipkart Group) from directly or indirectly selling its inventory on the marketplace platforms owned/controlled by the Flipkart Group.]

8. Relaxations to start-ups
The FDI Policy 2020 incorporates the already introduced clarification that for sectors under the automatic route, issue of equity shares against import of capital goods/machinery/equipment (excluding second – hand machinery) and pre-operative/pre-incorporation expenses (including payment of rent etc.) is permitted under automatic route.


1. Foreign Investment Facilitation Portal (FIFP https://fifp.gov.in/) is the new online single point interface of the Government of India for investors to facilitate FDI .

2. There are about 11 (eleven) notified sectors/activities requiring government approval.


1. Restriction on investment by entities or citizens situated in bordering nations under Press Note 3 issued on April 17, 2020 (“Press Note”):

An entity of a country, which shares land border(s) with India (i.e. countries such as China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan) or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route. Further, paragraph 4.1(ix)(a) of the FDI Policy of 2020 sets out that the applications involving investments from an entity of a country, which shares land borders with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country as required in terms of the Press Note read with the Non-Debt Instruments Rules requires approval from the competent authority identified by DPIIT.

2. Ambiguity: The Press Note puts restriction on investment from any entity “beneficially owned” by entities in countries sharing a land border with India, therefore, foreign investors and funds which although not owned/controlled by Chinese entities but have minority stakes/limited partners from China can be treated to be covered within the restrictions of the Press Note. However, it may be possible to take a view that transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly by an entity falling within the ambit of the Press Note to an entity not affected by restriction under the Press Note, may possibly be permitted without any government approval.

It is pertinent to note that the term ‘beneficial owner’ has not been defined either under the Press Note, the Non-Debt Instruments Rules or the FDI Policy of 2020. Therefore, the definition and explanation of the term as used under the Companies (Significant Beneficial Owners) Rules 2018 (“Companies Rules”) and/or the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”), may be referred to for determination of the beneficial owners. However, both Companies Rules and PMLA Rules, have different thresholds for determination of beneficial owners in case of companies. The thresholds for identifying a significant beneficial owner of a company under the Companies Rules is 10% (ten percent) ownership/voting rights or control/significant influence . Whereas the thresholds under the PMLA Rules for identifying the beneficial owner of a company is 25% (twenty five percent) controlling ownership/profit share of the company or the person who holds the position of senior managing official . Therefore, a clarification is required from the DPIIT on the issue of thresholds to be used for determination of beneficial owner for the purpose of compliance with the Press Note.

3. Government thinking: The Press Note changes the FDI Policy in two fundamental respects: First, it expands the list of countries whose investors are no longer eligible to invest in India under the automatic route. Second, an investment in India that would otherwise fall under the automatic route now falls under the government route if it is from an entity whose “beneficial owner” is from such countries which shares land border with India. Further, the FDI Policy 2020 blocks the indirect acquisition of investments by entities based in China to prevent opportunistic takeover of Indian companies. The amended rules do not prevent investment flows from the bordering country but ensures that all investments would be closely scrutinised. It appears that the concept of ‘beneficial owner’ under the Press Note has been purposely kept open-ended by the government so as to give itself the elbow room to deal with each case of investment from the neighbouring nations appropriately on a case to case basis in the interest of the nation.

-Abhinav Bhalaik (Partner) and Chirag Shah (Associate)

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