The Corporate Affairs Ministry has notified changes in rules to put a check on Chinese firms making investments in Indian companies. Experts say though this is a consequence of Press Note 03 on changes in foreign investment norms and ensure strict compliance, it will have larger implications.

According to gazette notification, a proviso has been added to Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014. It says “No offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.” Also, the applicant will have to clarify whether it required government approval of not.

Press Note 03 prescribes an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only through the Government route. This provision was inserted mainly to curb Chinese investment in India.

Experts views

Ashish Kumar Singh, Managing Partner of Capstone Legal, says India has a high volume of commercial interaction with China and it seems that the government wants to keep a watchful eye on Chinese entities making inroads in the Indian market. “The Companies Act gives the government, wide powers to frame rules under Section 469 of the Act and if the government finds it necessary, it may also invoke penal provisions to enforce these rules,” he said.

Sriram Ramachandran, Partner, Phoenix Legal, says post amendment of rules, a copy of approval (government), where applicable is required to be filed along with PAS 4 (the form) by the company proposing to receive foreign investment. “The regulatory position set out in Press Note 3 on investments into India from land bordering countries continues and the MCA notification merely attempts to ensure stricter compliance with Press Note 3”, he says.

Key factors

According to Manish Gupta, Partner with IndusLaw, changes in Companies (Prospectus and Allotment of Securities) Rules along with Share Capital and Debenture Rules bring in few interesting things. Firstly, the government has now made it mandatory for foreign investors to make a positive statement to the investee Indian Company (in the form of its application form to be submitted to the Company in case of private placement and in the form SH-4 in case of secondary sale) that it is entitled to acquire shares either through primary route or secondary route without requiring any government approval under the NDI (non debt instruments) rules. But more importantly, the scope here is not limited to PN-3 and would cover the entire set of NDI Rules, i.e., it is not limited to investors from the land bordering countries or issues related to PN-3.  

Secondly, it makes it mandatory for the Indian company to ensure that the foreign investor is not incorporated in, or is not a national of, a land bordering country but it does not talk about the wide and vague concept of beneficial ownership as provided in the PN-3. However, same is not the case with positive confirmation to be made by the foreign investors as the scope is not limited but covers the entire NDI Rues. “Thirdly, this has reaffirmed the government’s position and the general market notion that PN-3 will continue for a longer period and is not a temporary measure by the Indian Government,” Gupta said.