Disclosure norms on investments from neighbour nations tightened

The government has tightened disclosure norms for companies seeking investment from countries with which India shares land borders.

The Ministry of Corporate Affairs (MCA) has amended the rules on issuing a prospectus and allotting shares to ensure companies are compliant with foreign direct investment norms. The move will refine India’s current investment approval mechanism.

Under the new norms, the receiving entity (Indian firm) has to specify whether the investment sought is from a border country. The receiving entity has to mention in its application whether the proposed share allotment requires approval under foreign exchange management rules and, if so, whether it has been secured and enclosed.

This is alignment with the tweaked FDI policy of 2020 under the approval route to curb hostile takeovers.

According to it, FDI proposals for any sector from these countries need government approval. Countries that share land borders with India are China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.

“…. no offer of any securities is to be made to an entity or a national of a country that shares land border with India unless prior approval has been obtained from the Indian government as per the Foreign Exchange Management (Nondebt Instruments) Rules and is submitted along with the private placement offer cum

Under the new norms, the receiving entity (Indian firm) has to specify whether the investment sought is from a border country

application letter,” according to the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022, issued on Thursday.

The Department for Promotion of Industry and Internal Trade (DPIIT) had in April 2020 restricted investment in India from countries that share land borders with India by making it mandatory to have sovereign approval for that. “The recent notification from the Ministry of Corporate Affairs aligns the corporate laws with this policy restriction and approval requirement. The changes cast an additional procedural compliance on the Indian investee company by requiring it to furnish the approval along with its private placement related filing,” said Sandeep Jhunjhunwala, M&A Partner at Nangia Andersen LLP

A disparity could probably lie where the beneficial owner (and not the investing shareholder) is from a restricted country. At present, there is no reporting mechanism even in the case of transfer of ownership.