Indian tech companies, many other unicorns and the like, are running helter-skelter. Thanks, in large part, to the ambiguous changes made to the recently revised FDI policy. The revisions make government nod mandatory for FDI from countries that share a border with India. This was announced in Press Note 3 (April 17). Later, to give effect to this, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, (FEMA Rules) were amended. Although the government has denied this, the popular perception is that the policy change is aimed at China. From a legal standpoint, the press note is poorly drafted; the intent of the policy and language of the amendments do not match. The government said that it revised the policy to curb “opportunistic takeovers/acquisitions” of Indian companies due to the Covid-19 pandemic. Yet, there isn’t a trace of this in the wording of the substantive parts of the press note. When the press note was issued, everyone had waited with bated breath and hoped that FEMA Rules would clear the air. But, FEMA Rules, released on April 22, did not offer any guidance, and thus, have only disappointed and muddied the waters. This has resulted in a guessing game on the interpretation of words used, and the intent of the policy. The concept of the letter of the law over intent, and, indeed, its converse has been starkly highlighted. The settled principle is that no provision in a statute should be read as redundant. In this context, the FEMA Rules should be given a literal interpretation. At the same time, the doctrine of purposive interpretation of statutes should not be ignored. This doctrine interprets a statute to find the real purpose for its enactment. This means words in a statute must be read harmoniously with the intent sought to be achieved.
Sadly, in this case, there is only a little chance for purposive interpretation to succeed. This is because the FEMA Rules have not banned FDI from neighbouring countries. All that it requires is prior government approval. Therefore, the letter of the law and the intent do not seem to be at odds. In effect, the amendments provide that it is the government, and not the Indian company or the foreign investor, which can decide if an acquisition is opportunistic or not. Thus, the forum where this question will get settled in is the government; the onus is on the Indian company and foreign investor to satisfy that their acquisition is not opportunistic. On its part, the government is expected to be guided by the rules it has set and should clear the genuine proposals quickly.
This policy interpretation is reminiscent of how the government once interpreted the FDI policy, way back in 2013. The government had then smartly interpreted that a strategically placed comma in the FDI policy meant that FDI is also allowed in greenfield airlines and not just in existing airlines. This interpretation facilitated the government’s nod for greenfield JV alliance between Tata and Air Asia. Ironically, the ministry of civil aviation had opposed the proposal for not being consistent with the FDI policy. But, investors had hailed the government’s style of interpretation.
In the present situation, a strict interpretation of FEMA Rules will come as a harsh reality. In these turbulent times, Indian companies are already struggling for capital. Such interpretation won’t spare genuine cases of fundraising. For example, funding obligations that were agreed pre-Covid-19 will also get impacted. Even if an investor agrees to pay the same price that was originally negotiated, it would be odd if the pandemic is not used as an opportunity, government approval will still be needed. An infusion of additional capital in an already set-up 100% subsidiary cannot be called opportunistic. Even paying the agreed balance consideration for share warrants and partly paid shares that were subscribed pre-Covid-19 is not opportunistic. Yet, all of this will require government approval. Irrespective of the kind of fundraising, the only rule that seems to apply is that any issue or transfer of shares for FDI from countries sharing a border with India will now require government approval.
The author is Partner, J Sagar Associates
Views are personal