The document summarizes India's new foreign direct investment (FDI) policy related to beneficial ownership. The key points are: 1) The new policy mandates prior government approval for foreign investments from countries that share a land border with India to prevent opportunistic takeovers during the COVID-19 pandemic. 2) It defines beneficial ownership and notes that investments where the beneficial owner is from a bordering country now require government approval. 3) The definition of beneficial owner refers to rules regarding significant beneficial owners under the Companies Act and beneficial owners under money laundering laws.

1. BENEFICIAL OWNERSHIP UNDER THE NEW FDI POLICY

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3. • The Government of India announced scrutiny of investments from neighbouring countries to curtail any
possibility of opportunistic takeovers of the Indian firms during this period of massive economic slowdown
in the country due to COVID outbreak.
• The Department for Promotion of Industry and Internal Trade, agency responsible for FDI policy issued a
press note on 17 April 2020, which was followed by a gazette notification dated 22 April 2020 by the
Ministry of Finance, which notified the Foreign Exchange Management (Non-debt Instruments)
Amendment Rules, 2020.
• The new FDI policy has made it mandatory for foreign investments from countries that share a land border
with India to obtain prior approval from the government.
• The Amendment is brought under Rule 6 which deals with Investments by person resident outside India.
INTRODUCTION TO NEW FDI POLICY

4. PREVIOUS POSITION
• A person resident outside India could make an investment in India under
automatic route, subject sectoral caps and restrictions.
• However, a citizen of or an entity incorporated in Bangladesh or Pakistan could
invest only under the Government route.
• Further, citizen of or an entity incorporated in Pakistan could invest in defense,
space, atomic energy and sectors or activities prohibited for foreign investment
even through the government route.

5. CURRENT POSITION
• A person resident outside India could make an investment in India under automatic route, subject
sectoral caps and restrictions.
• However an entity of a country, which shares land border with India (China, Nepal, Myanmar,
Bhutan, Pakistan, Bangladesh or Afghanistan) or the beneficial owner of an investment into India
who is situated in or is a citizen of any such country, shall invest only with the Government
approval.
• Further, citizen of or an entity incorporated in Pakistan could invest in defense, space, atomic
energy and sectors or activities prohibited for foreign investment even through the government
route.
• Also, in the event of the transfer of ownership of any existing or future FDI in an entity in India,
directly or indirectly, resulting in the beneficial ownership falling within the restriction or purview
of the above provisos, such subsequent change in beneficial ownership shall also require
government approval.

6. BENEFICIAL OWNER OF AN INVESTMENT
Since the term “Beneficial Owner”/ “Beneficial Ownership” has not been
defined under the FEMA regulations, the definition of the term under –
• The Companies (Significant Beneficial Owners) Rules 2018
• The Prevention of Money-laundering (Maintenance of Records) Rules,
2005
may be referred to determine beneficial ownership in an investment.

7. COMPANIES ACT, 2013
The Companies (Significant Beneficial Owners) Rules 2018
• Beneficial Interest is defined in Section 89 of the Act to include –
the right or entitlement of a person alone or together with any other person to:
(i) exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) receive or participate in any dividend or other distribution in respect of such share
• Significant Beneficial Owner is defined in Section 90 read with Rules as “individual, who acting
alone or together, or through one or more persons or trust (including a trust and persons resident
outside India) holds beneficial interests, of not less than 25 % or 10%, in shares of a company or
the right to exercise, or the actual exercising of significant influence or control over the company”
• Control shall include the right to appoint majority of the directors or to control the management
or policy decisions exercisable by a person or persons acting individually or in concert, directly or
indirectly, including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner

8. The indirect holding in a company may be determined in the following manner –
Body corporate (in or outside
India) other than LLP
Individual holding majority stake in either the reporting company or its ultimate holding
company
Partnership Entity Individual who
• Is a partner
• Has majority stake in the body corporate/ ultimate holding company of that body
corporate which is a partner of the partnership entity
Trust Individual who is
• A trustee in case of a discretionary trust or a charitable trust
• A beneficiary in case of a specific trust
• The author or settlor in case of a revocable trust
A pooled investment vehicle or
an entity controlled by the
pooled investment vehicle
(being a member State of the Financial Action Task Force on Money Laundering and the
regulator of the securities market in such member State is a member of the International
Organization of Securities Commissions), then an Individual who is –
• A general partner
• An investment manager
• A CEO where the investment manager of such pooled vehicle is a body corporate or a
partnership entity

9. PREVENTION OF MONEY LAUNDERING RULES, 2005
Company Beneficial Owner has been defined as the natural person who, whether acting alone or together, or
through one or more juridical person, ultimately owns (entitlement to more than 25 per cent of the
shares or capital or profits of the company) or controls (right to appoint majority of the directors or
to control the management or policy decisions including by virtue of their shareholding or
management rights or shareholders agreements or voting agreements) a client and/or the person on
whose behalf the transaction is being conducted, and includes a person who exercises ultimate
effective control over a juridical person.
Partnership Firm the natural person(s), who, whether acting alone or together, or through one or more juridical
person, has/have ownership of/entitlement to more than 15 per cent of capital or profits of the
partnership
Trust BO shall include the author of the trust, the trustee, the beneficiaries with 15% or more interest in
the trust and any other natural person exercising ultimate effective control over the trust through a
chain of control or ownership
An unincorporated
association or body
of individuals
natural person(s), who, whether acting alone or together, or through one or more juridical person,
has/have ownership of/entitlement to more than 15 per cent of the property or capital or profits of
the unincorporated association or body of individuals

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