May 15, 2015
The Government of India ("Government") has published the updated foreign direct investment policy ("FDI Policy") for the year 2015. This publication essentially consolidates various circulars issued by the Government in relation to foreign direct investment during the past year.
Importantly, one key amendment to note is in paragraph 3.4.4 (i)(a) of the FDI Policy and relates to the transfer of shares of an Indian company ("IndCo") between non-resident shareholders.
Under the FDI Policy, a non-resident is permitted to transfer shares of an IndCo to another non-resident without the need to comply with the pricing guidelines of the Reserve Bank of India (which apply to transfer of shares of an IndCo between residents and non-residents and vice versa). There are also no reporting requirements under the FDI Policy for a transfer of shares of IndCo between non-residents.
There has, however, always been some ambiguity on whether the prior approval of the Government (through the Foreign Investment Promotion Board ("FIPB")) is required for a transfer of shares of IndCo between two non-residents if IndCo is engaged in a sector that requires prior Government approval for foreign direct investment (for example, in Defence, Telecom, etc., the "Approval Route Sector"). There have been conflicting views on this, and various law firms in India had taken the position that since the primary investment by a non-resident in an IndCo engaged in an Approval Sector was made after obtaining FIPB approval, a secondary transfer of shares between non-residents would not require any additional FIPB approval. This view was primarily based on the premise that since the FIPB had cleared the primary foreign investment, there was no need to subsequently approach the FIPB for a secondary share transfer between non-residents.
The FDI Policy now expressly states that prior approval of the FIPB will be required for a transfer of shares of an IndCo between two non-residents if IndCo is engaged in an Approval Route Sector. In our view, the Government’s objective for this amendment is to ensure that the non-resident transferee is someone who is acceptable to the Government, given that the Approval Route Sectors are strategically sensitive industries.
 Circular dated May 12, 2015.
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