fema: FEMA authorization is essential to offer securities to companies from neighboring countries

Companies will now have to ensure they have government approval under exchange management rules before offering securities to any entity from a country that shares a land border with India.

The Ministry of Commercial Affairs (MCA) has notified the Company (Prospectus and Allocation of Securities) Amendment Rules 2022, reflecting changes to the foreign direct investment regime.

“No offer or invitation of securities under this Rule shall be made to any body corporate or national of any country which shares a land boundary with India unless such body corporate or the national, the case, has obtained government approval under the FEMA Rules (Non-Debt Instruments), 2019,” the notification reads.

In the event that companies have offered securities to such entities, they must provide a statement that the transaction has been approved and must attach the approval letter with the private placement offer and application letter.

In 2020, the government had placed all FDI from bordering countries under the approval path to curb opportunistic takeovers during the pandemic.

The latest move is in line with those changes, which were largely aimed at preventing Chinese investors from taking over Indian companies.

Law enforcement agencies, such as the Law Enforcement Branch and the Income Tax Department, were probing many companies with ties to China suspected of money laundering and of tax evasion, on the basis of their information.

This decision places the responsibility for compliance on the recipient of the investments.

“The recent notification from the Ministry of Corporate Affairs only aligns the company laws with this restriction and approval requirement policy. The notification, however, imposes additional procedural compliance on the Indian owned company by requiring it to provide approval with its private placement related documents,” said Sandeep Jhunjhunwala, M&A Partner at Nangia Andersen LLP.

Relaxation to hold the arm

The MCA has allowed companies to hold annual general meetings via videoconference until December 31. The previous exemption was until the end of June 2022.

In its circular, the MCA clarified that companies with general meetings scheduled for 2022 can now hold such meetings by videoconference or other audiovisual means until December 31.

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