Defining ‘beneficial owner’ and FDI restrictions

To restrict opportunistic takeovers/acquisitions of Indian companies due to low valuations in light of covid-19, the Department for Promotion of Industry and Internal Trade (DPIIT) via Press Note 3 of 2020 (PN3) revised the Consolidated Foreign Direct Investment (FDI) Policy and notified an amendment to the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 (NDI rules), such that an entity of a country that shares a land border with India, or where the beneficial owner of an investment in India is situated in or is a citizen of such country, then investment is permitted only under the government route.

The direct or indirect transfer of ownership of any existing or future FDI into an Indian entity resulting in beneficial ownership falling within the said restriction, resulting in change of beneficial ownership, will also require government approval.

The term “beneficial owner” is defined neither in PN3 nor under the Foreign Exchange Management Act, nor the NDI rules, which has led to a debate on whether the threshold of beneficial owner under the Companies (Significant Beneficial Owners) Rules, 2018 (SBO rules), or the PML (Maintenance of Records) Rules, 2005, may be used for interpretation. However, due to the different threshold under the SBO rules (10%) and the Prevention of Money Laundering Act (PMLA) Rules (25%), this is doubtful.