India Considering More Stringent Regulations for Companies Owned by Foreign Entities: Report

The Indian government is in the process of reassessing its current foreign direct investment (FDI) regulations. The aim is to streamline investment protocols and address existing gaps. According to sources cited by Reuters, the discussions regarding these regulatory amendments are nearing completion. The Indian administration intends to introduce more stringent guidelines regarding foreign ownership in the country.

As detailed in a report from Reuters, the anticipated changes will redefine the criteria for both direct and indirect foreign ownership in Indian firms, making them subject to FDI regulations. In conjunction with this, the Indian government is evaluating its foreign direct investment rules, aiming to facilitate investment and close any loopholes. Sources from Reuters suggest that the dialogues surrounding these modifications are close to being finalized.

Establishing a New Framework
According to the report, a new category named Foreign Owned and Controlled Entities (FOCE) is being developed, which will encompass Indian businesses that have direct foreign investments. This new classification will refer to an Indian company investment fund that is overseen by an entity or individual outside of India. Additionally, it will incorporate indirect foreign investments and ensure they adhere to the FDI regulations whenever there are changes in ownership or corporate structure.

“Any actions that cannot be performed directly will also be prohibited indirectly. This principle will now be explicitly stated in the regulations,” Reuters reported, referring to insider sources. The report also indicated that even domestic restructuring events or internal transfers may activate FDI obligations for foreign-controlled companies if the proposed regulatory changes are enacted.

Under the revised regulations, any transfer or indirect sale of shares within a foreign-owned enterprise in India must be reported to the relevant Indian authorities, as reported by Reuters. All transactions are mandated to be conducted at fair market value. Moreover, the involved company must adhere to the sector-specific caps on foreign investment.

Rationale Behind the New Regulations
With the introduction of these regulations, the Indian government aims to prevent foreign investors from circumventing the country’s FDI policies, as reported by sources to Reuters. The establishment of the FOCE category will pose challenges for Chinese companies attempting to infiltrate regulated sectors in India through indirect means, such as using complex Indian companies and offshore investment vehicles.