In brief: foreign investment review procedure in India

Procedure

What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?

Where the proposed foreign investment is to be made via the approval route, the jurisdiction of the competent authorities is triggered, as they have the authority to review the proposed applications. Foreign direct investment transactions of more than 50 billion rupees need the prior approval of the Cabinet Committee on Economic Affairs. Further, any investment or payment made into India must be reported to the Reserve Bank of India (RBI) either through authorised dealers or directly to the RBI, depending on the nature of investment or payment made into India. 

Under the Competition Act 2002 (the Competition Act), a combination will need to be mandatorily notified to the Competition Commission of India (CCI) if it satisfies any of the following assets and turnover thresholds (as enhanced by the central government through its Notification No. SO 675(E) of 4 March 2016), and is unable to benefit from any of the available exemptions (please also see ‘Key developments of the past year’ for relevant details of imminent policy reforms, in terms of introduction of a deal value threshold):

What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?

Foreign investments are permitted in India through the automatic route and the approval route depending on the sector. No prior approval is required for activities falling under the automatic route, subject to compliance with the applicable performance conditions. However, areas or activities that do not fall within the automatic route and are under the approval route require the prior approval of the competent authority. Further, foreign investment in some sectors, such as investment in greenfield in the pharmaceuticals sector, is permitted 100 per cent through the automatic route. However, investment in brownfield in the pharmaceuticals sector is permitted up to a 74 per cent via the automatic route, and beyond this threshold via the approval route. To obtain approval, the investor company or investee company (the applicant) must submit a single online application on the website of the Foreign Investment Facilitation Portal (FIFP) along with such information as required, which, inter alia, includes:

• a summary of the foreign investment proposed;
• the certificate of incorporation and memorandum and articles of association, memorandum and articles of association of the investor and investee company (and in the case of a joint venture, of the joint venture company);
• audited financial statements of the investor and investee company for the previous financial year;
• income tax return for the previous financial year;
• diagrammatical representations of the cash flow from the original investor to the investee company and the pre- and post-shareholding of the investee company;
• foreign inward remittance certificates evidencing the fund flows; and
• a copy of the board resolution of the investee or issuing company in the case of a fresh issue of shares. Certain categories of foreign investors, such as investment funds, are required to provide additional documentation pertaining to the investment managers and contributors to these funds.

If the online application is not digitally signed, the Department for Promotion of Industry and Internal Trade (DPIIT) will direct the applicant to submit a signed physical copy of the application to the concerned competent authority within seven days of the communication from the DPIIT (subject to a grant of an additional seven days if the signed physical copy is not submitted within the initial period of seven days). If the signed physical copy of the application is not submitted to the competent authority within 14 days of the initial communication from the DPIIT to the applicant, the proposal will be treated as closed. There is no fee for filing an online application.

Further, as highlighted above, the DPIIT issued Press Note No. 3 of 2020 dated 17 April 2020, according to which any entity of a country sharing a land border in 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 under the government route. This was primarily done to stem any attempts by Chinese firms to take control of Indian firms that have been affected by covid-19 related lockdowns. A corresponding amendment was introduced to the NDI Rules 2019 by the Department of Economic Affairs, Ministry of Finance, on 22 April 2020.

Further, all notifiable combinations must be notified to the CCI in the format prescribed under the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (the Combination Regulations). The Ministry of Corporate Affairs (MCA) of the Indian government issued a notification on 29 June 2017 that does away with the erstwhile requirement to necessarily notify a combination within 30 calendar days of an event triggering a notification requirement, for a period of five years from the date of publication of the notification. This notification was further extended by an additional period of five years by way of a notification from the MCA dated 16 March 2022. However, the requirement to file a notice with the CCI is still mandatory and the suspensory regime (ie, the requirement to receive CCI approval prior to consummating a notifiable transaction in any way or form) still applies. Subject to the extent of market shares in the overlapping markets, the transaction may be notified in the shorter form (Form I) or a more detailed form (Form II). The CCI, by way of a gazette notification dated 13 August 2019 (the 2019 Amendment) and 31 March 2022 (the 2022 Amendment), amended the Combination Regulations and revised the scope of information that must be provided under Form I and Form II, respectively. Subsequent to filing the application, the CCI reviews the combination to ascertain if the combination causes or is likely to cause any appreciable adverse effect on competition (AAEC), before passing its final order.

The 2019 Amendment also introduced a ‘green channel’ clearance option for transactions with no overlaps. Under the green channel, transactions between parties that are not engaged in identical or similar business, and are not vertically linked or engaged in complementary business activities will be ‘deemed’ approved on notification to the CCI. A Form I being filed under the green channel must be accompanied by a declaration that shows both:

• the lack of overlap between transacting parties and their respective groups; and
• the proposed transaction is not causing an AAEC.

Notably, if the CCI subsequently concludes that a transaction notified to it under the green channel did not, in fact, meet the requirements for such a filing or that the declaration by the notifying party or parties in this regard was incorrect, the notice and the ‘deemed approval’ will be void ab initio and the CCI shall deal with the combination ‘in accordance with the provisions of the Competition Act’. Before reaching a conclusion, the CCI must give parties an opportunity to be heard.

Which party is responsible for securing approval?

The approval of the competent authority is required if the investment is made under the approval route and either of the parties, being the foreign collaborator or foreign investor, or the Indian company, can secure approval from the competent authority. Further, where an investment involves an acquisition of shares, assets, voting rights or control, the acquirer will be responsible for notifying the combination to the CCI. In the case of a merger or amalgamation, all the parties are jointly responsible for notifying the combination to the CCI.

How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?

Within two days of submission of the online application, the DPIIT is required to e-transfer the application to the competent authority concerned and also circulate the application to the RBI, the Ministry of Home Affairs (MHA) (if the proposed foreign investment is in a sector requiring security clearance) and the Ministry of External Affairs. The concerned ministries are required to upload their queries regarding the application on the FIFP website within four weeks of online receipt of the application. If security clearance is required from the MHA, the aforesaid timeline can be extended to six weeks (Stage 1). Within one week of the completion of Stage 1, the competent authority may pose queries to the applicant and ask the applicant for relevant additional information and documents. The applicant must respond to the queries of the competent authority within one week of the date of receipt of queries (Stage 2). If no clarifications to the queries are received within one week, the applicants will be reminded to expedite their clarifications within the next seven days, failing which a final reminder may be issued to the applicant to provide the information seven days before closure of the application due to incomplete or inadequate information or documents from the applicant. As and when the application is complete in all respects (which takes around six to eight weeks from receipt of the application), the competent authority must process the application for decision and convey its decision to the applicant within the next four weeks. The above timelines are subject to variation if the application is subject to receipt of security clearance from the MHA or because of other administrative reasons. The status of the application can be tracked on the FIFP website.

As far as the CCI is concerned, the overall prescribed statutory time period to review the combination and pass a final order is 210 calendar days from the date of filing of the notification, and in limited situations, where remedies may be warranted, 270 days to disapprove or approve the transaction. The Combination Regulations further provide that the CCI shall endeavour to pass its final order within 180 calendar days of filing the notification. Further, the CCI must form a prima facie opinion on the likelihood of the combination resulting in an AAEC within 30 working days of filing the notification. This is subject to ‘clock stops’ on account of requests from the CCI for additional information, extensions sought by parties and such like. The extent of overlaps relating to the combination, the sensitivity of the government towards the sector to which the combination relates and the existence or likelihood of the combination resulting in an AAEC, are some of the factors that may determine the timeline for clearance. In a majority of cases, the CCI has approved transactions within the 30-working-day timeline (excluding clock stops). Please see ‘Key developments of the past year’ for relevant details of imminent policy reforms, in terms of the proposed change to the CCI’s review timelines.

There are four broad categories of exemptions under the merger control regime that the parties to the combination can analyse and benefit from, namely: 

• Statutory exemption: as per section 6(4) of the Competition Act, the requirement of mandatory notification to the CCI prior to the closing of the transaction does not apply to any financing, acquisition or subscription of shares undertaken by FIIs, or venture capital funds registered with the Securities and Exchange Board of India, public financial institutions and banks pursuant to a covenant of an investment agreement or a loan agreement. However, section 6(5) of the Competition Act prescribes that these entities are required to provide details of the acquisition, including control, circumstances for exercising this control and consequences of default arising out of these loan agreements or investment agreements to the CCI within seven days of the date of closing. Please see ‘Key developments of the past year’ for relevant details of imminent policy reforms, in terms of the proposed changes regarding the entities that can avail themselves of this exemption. 
• Categories of transactions ‘normally’ exempt from mandatory notification: Regulation 4 read with Schedule 1 of the Combination Regulations treats certain categories of combinations as being ordinarily not likely to cause an AAEC in India, and hence provides that a pre-notification need not normally be filed for these transactions.
• Target-based exemption (de minimis exemption): further to the thresholds notification, any transaction where the enterprise (ie, the enterprise whose shares, voting rights, assets or control are being acquired or are being merged or amalgamated) either has assets not exceeding 3.5 billion rupees in India or has a turnover not exceeding 10 billion rupees in India, is currently exempt from the mandatory pre-notification requirement. Please see ‘Key developments of the past year’ for relevant details of imminent policy reforms, in terms of introduction of a deal value threshold. 
• Exemptions for specific sectors: on 30 August 2017, the government of India issued a notification exempting all mergers and acquisitions involving nationalised banks, under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act 1980, for 10 years (that is, until 30 August 2027). On 22 November 2017, all mergers and acquisitions involving central public sector enterprises operating in the oil and gas sectors under the Petroleum Act 1934 have been exempted from the merger control provisions for five years (that is, until 22 November 2022). On 11 March 2020, the government of India issued a notification whereby the exemption from merger control provisions was also extended to a banking company under Section 45 of the Banking Regulation Act, 1949, for a period of five years (that is, until 10 March 2025). 

There are no expedited or ‘fast-track’ options for the review process; however, occasionally the government of India considers proposals for the fast-track single-window clearance of foreign investment on a jurisdictional basis. With respect to the Competition Act, if a transaction is able to avail the green channel route (after satisfying all conditions for a green channel filing), then this transaction will be ‘deemed’ approved upon notification to the CCI.

Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?

Where investment is through the approval route, prior approval must be obtained before the transaction is completed. If the parties complete the transaction before obtaining the relevant approvals or in a manner that contravenes the Foreign Exchange Management Act 1999 (FEMA) (or a rule, regulation, notification, direction or order is issued in exercise of the powers under the FEMA) or contravene any condition subject to which an authorisation is issued by the RBI, the parties shall, upon adjudication by the designated authorities of the Enforcement Directorate (Directorate), be liable to a penalty of up to three times the sum involved where this amount is quantifiable, or up to 200,000 rupees where the amount is not quantifiable. A penalty of 5,000 rupees will be incurred for every day after the first day on which the contravention continues. Further, under section 14 of the FEMA, in the event of non-payment of the penalty imposed under section 13 of the FEMA within 90 days from the date the notice for payment of this penalty is served, the parties shall be liable to civil imprisonment.

 Every notifiable combination requires the approval of the CCI prior to its consummation. If a notifiable combination is not notified, or if the parties take any step to implement the combination (or a part thereof) prior to the receipt of the CCI’s approval, the CCI may impose penalties extending up to 1 per cent of the total turnover or assets (whichever is higher) of the combination. In the past, the CCI has imposed penalties of up to 2 billion rupees. To date, the CCI has not exercised its power to impose the highest allowable penalty under the Competition Act.

Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?

Formal or informal guidance from the competent authorities can be obtained prior to a filing being made or during the time that the application is in process. For any concerns regarding interpretation of the FDI policy, foreign investors can seek informal guidance by filing representations to the DPIIT through industry bodies. This can be followed up with a formal request for clarification made to the DPIIT. An applicant can submit a clarification to the DPIIT listing its query in the prescribed form. Informal guidance may also be sought from the authorised dealer banks who are involved in the transaction. The CCI has also put in place a mechanism for pre-filing informal merger consultations, but it is not binding.

When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?

Experts and specialists are involved at the stage when policy decisions are being made for the purposes of receiving recommendations. Lobbying does not formally prevail in India. There is no informal procedure or mechanism available to facilitate clearance of any proposal. The process of granting approval is transparent and is solely considered on the basis of the NDI Rules 2019 and the standard operating procedure issued by DPIIT. The applicant must meet all the legal requirements as prescribed for the approval to be granted. Applicants can track the status of their applications on the FIFP website on both a daily and a weekly basis. In the past, economists have been engaged by parties for certain complex merger control filings to the CCI.

What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?

The DPIIT and the RBI may review, challenge and unwind an approved transaction. In Bycell Telecommunication India P Ltd v Union of India and Ors, WP (C) No. 8989 of 2009, the Foreign Investment Promotion Board, having previously granted approval to the petitioner, revoked it – after the Ministry of Home Affairs withdrew the security clearance of the petitioner – on the grounds that even if the petitioner had complied with requirements under the laws relating to foreign investment, lack of security clearance is a valid ground to revoke an application. Further, under the provisions of the FEMA, the central government, by an order published in the Official Gazette, may appoint as many officers of the central government as it likes as the adjudicating authorities for holding an inquiry into the person alleged to have committed contravention of the FEMA. The Directorate is a specialised financial investigation agency under the Department of Revenue, Ministry of Finance, which has, under the central government, been accorded powers and is mandated with the task of enforcing the provisions under the FEMA. 

Where the transactions that met the assets or turnover thresholds prescribed under the Competition Act were not notified to the CCI, the CCI may review, challenge or initiate inquiries into those combinations to ascertain whether any of them has caused, or is likely to cause, an AAEC. Such power of review exists for a period of one year following the closing of the transaction.