To curb the opportunistic takeovers/ acquisitions of Indian companies, the Government of India on April 17, 2020, had announced a change in its Foreign Direct Investment (‘FDI’) policy pursuant to Press Note No. 3 (‘Press Note’).
Pursuant to Press Note, all the foreign direct investments, either by way of subscription or acquisition, in Indian companies by entities of a country sharing a land border with India or where the beneficial ownership vests with the residents of neighbouring countries, require prior Government approval.
The above implies that the investment made in Indian companies, from countries not sharing a land border with India, but if the investment from the foreign investors indirectly leads to beneficial ownership or control being vested in residents of neighbouring countries, such investment would also need prior approval from the Government of India. Further, Indian companies having existing foreign direct investment and/or beneficial ownership of investment from the neighbouring countries and intend to make downstream investment in another Indian company would also require prior Government approval for making a downstream investment, as in such a scenario the ultimate beneficial ownership in investee India company would vest with neighbouring countries.
In order to align the requirements of Press Note with the Companies Act, 2013 (‘Act’) and to streamline the disclosure requirements, the Ministry of Corporate Affairs (‘MCA’) has issued amendments to the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules’) and Companies (Share Capital and Debentures) Rules, 2014 (‘Share Capital Rules’). Indian companies can raise the funds by following methods:
(i) making an offer to identified new investor(s) through a private placement under Section 42 of the Act;
(ii) making an offer to any person (whether they are existing shareholder(s) or not) through a preferential issue under Section 62 (1)(c) of the Act; and
(iii) making an offer to existing equity shareholders in proportion to their shareholding, through rights issue under Section 61(1)(a) of the Act.
As per the amendment in PAS Rules, the investee Indian companies would need to carry out proper diligence, to ensure if the identified investor(s) would require Government approval for investing in Indian companies if an offer is being made through private placement and preferential issue. If prior approval is required under FDI policy by the investor(s), then the investee company are allowed to make an offer or invitation of any securities to such investor(s), only after the requisite approval from the Government has been obtained by the investor(s). The approval letter would also need to be attached by the investor(s) to form PAS 4 (Offer letter) while accepting the offer and the same would then be made available to the public, by attaching the PAS 4 along with the return of allotment (form PAS-3) with MCA.
Further, the MCA has also amended the form SH 4 (securities transfer form) wherein it would be the obligation of the transferee to disclose to the Indian companies, if the acquisition of shares by them in Indian companies would require prior Government approval and if yes, then the copy of the approval letter to be attached with the securities transfer form.
Above amendments not only align the provisions of the private placement and preferential issue with the requirement of Press Note, but they also add up the financial burden on the Company and its official, while certifying the MCA that the information provided in form PAS-3 and its attachment (including form PAS-4) are true and correct. In case of incorrect or suppression of information, the Company and its officers may be held liable to a penalty as per the Companies Act, 2013 in addition to non-compliance under Press Note and FEMA regulations.
The corresponding amendment in the process of rights issue with respect to the requirement of Government approval under Press Note is not made by MCA. This leaves a grey area in the process of the rights issue, where if the rights offer is renounced by all/any of the existing shareholders, in favour of a third party (not associated with the company), which leads to beneficial ownership or control being vested in residents of neighbouring countries. In such a scenario, the investee Indian company and its Board could not be in a position to identify the ultimate ownership of the investor(s) unless the approval/information is being furnished by the investor(s). Therefore, corresponding amendments in the process of a rights issue should be introduced to streamline the process.