Foreign Investment – China restriction: Since the 1990s, India has been liberalising its foreign investment regulations. However, in 2020 there was an instance of new restrictions being imposed on foreign investment, though in this case India appears to be following the example of leading western economies who have made similar moves.

In April 2020, the Indian government announced a targeted restriction on what it termed “opportunistic takeovers/acquisitions” of Indian companies during the Covid-19 pandemic. The new restriction requires prior Indian government approval for any investment into India by an entity that is located in a country which shares a land border with India (i.e. Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan) or where the beneficial owner of such investment is located in such country. Further, any change in control of a company that has an existing investment in India, where the beneficial ownership as a result of a transaction would be held by an entity located in such a restricted country, would also require prior approval of the Indian government. The term beneficial owner/ownership is undefined and, as a result, the exact scope of the restriction is ambiguous. However, since investments into India from Pakistan and Bangladesh are already subject to restrictions, this move is largely believed to target Chinese investment/ acquisitions in India. It is also unclear if the restriction will be withdrawn after the pandemic.  

Foreign investment – liberalisation moves: Despite the forgoing, during the course of 2020, the Indian government continued its liberalisation efforts on foreign investment regulations in a number of sectors including:

• defence — the foreign investment limit increased from 49% to 74%;
• single brand retail trading — local sourcing regulations were further relaxed for 100% foreign investment;
• digital media — up to 26% foreign investment is now permitted with prior Indian government approval even for entities engaged in uploading / streaming of news and current affairs through digital media platforms.

Decriminalising offences under the Companies Act: The Companies Amendment Act 2020 has removed a number of offences dealing with non-compliance of various provisions of the Indian Companies Act including:

• the winding up of companies;
• correcting the registers of security holders; and
• the redemption of debentures.

Further, a number of other violations which earlier provided for imprisonment and criminal fines have been replaced with civil penalties. In addition, there has been rationalisation of civil penalties depending on the seriousness of the violation so that more serious violations have had their civil penalties enhanced but other violations now have lower civil penalties. A further innovation is the prescription of lower fine amounts for start-ups.

Sovereign Wealth Funds - Tax Exemption: The Indian government has proposed a tax exemption for Sovereign Wealth Funds and Pension Funds investing in Indian infrastructure.

The exemption applies to all dividends, interest and capital gains arising from investments in India made by Sovereign Wealth Funds and Pension Funds.

Currently, the exemption applies to investments in Infrastructure Investment Trusts (InvITs), debt and shares of companies engaged in infrastructure activities such as roads, ports, airports, bridges, water treatment and sewage and units of infrastructure Alternate Investment Funds.

The exemption applies to investments made after 1 April 2020 but prior to 31 March 2024 and must be held for a minimum period of three years.

To benefit from the exemption:

• A Sovereign Wealth Fund must satisfy the following conditions: (a) it must be wholly owned and controlled, directly or indirectly, by the government of a foreign country; (b) it must be set up and regulated under the law of such foreign country; (c) the earnings of the fund should be credited either to the account of the government of that foreign country or to any other account designated by that government such that no portion of the earnings is to the benefit of any private person; (d) the assets of the fund should vest in the government of such foreign country upon dissolution; and (e) it must not undertake any commercial activity whether within or outside India.
• A Pension Fund must satisfy the following conditions: (a) it must be created or established under the laws of a foreign country, including under the law of province, state or a local body; (b) it must not be liable to tax in the foreign country; and (c) it must satisfy other such conditions as may be prescribed.