Foreign investment in India is regulated by the Foreign Exchange Management Act, 1999 (“FEMA”) and the regulations issued thereunder, specifically the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (“FEMA 20”). FEMA 20, together with the consolidated foreign direct investment policy (“FDI Policy”) and the press notes issued, from time to time, by the Department of Industrial Policy and Promotion (“DIPP”) in the Ministry of Commerce and Industry, Government of India, regulates foreign direct investments (“FDI”) in India.

FDI is generally monitored and regulated by the Reserve Bank of India (“RBI”), India’s central bank and primary financial regulator. Insolvency and bankruptcy in India is now regulated by the Insolvency and Bankruptcy Code, 2016 (“Code”). Enacted in May 2016, the Code overhauled and consolidated the law in India in relation to insolvency of companies, limited liability partnerships (collectively, “Corporate Debtors”), and bankruptcy of unlimited liability partnerships and individuals. Since its inception the Code has been amended thrice.

The Insolvency and Bankruptcy Board of India (“IBBI”) has been set up under the Code, to perform the role of a regulator for insolvency and bankruptcy matters and has issued several regulations detailing the procedures under the Code. Clarifications and circulars have also been frequently issued by the IBBI and the Ministry of Corporate Affairs to clarify the procedures under the Code. The Code provides for a time bound corporate insolvency resolution process (“CIR Process”) of 180 days from the date of admission of an application before the NCLT (“Insolvency Commencement Date”). This time period is extendable, once, by a maximum of 90 days. During this period, creditors consider measures to resolve the financial distress of the Corporate Debtor and maintain and preserve its business operations by framing a plan, referred to as a “Resolution Plan”. Only upon the failure of the CIR Process can the Corporate Debtor be liquidated under the Code. The adjudicating authority for CIR Process and liquidation under the Code is the National Companies Law Tribunal (“NCLT”) and the appellate authority is the National Companies Law Appellate Tribunal.

In order to be eligible to submit a Resolution Plan in relation to the CIR process of a Corporate Debtor, the relevant resolution applicant and any person connected with the resolution applicant should not be disqualified as per the criteria prescribed under Section 29A of the Code. The Code has prescribed a very wide definition of “connected persons” which includes persons in control or management of the resolution applicant, promoters of the resolution applicant, persons who will be promoters of or in control or management of the Corporate Debtor during the implementation of the Resolution Plan and holding companies/subsidiaries/associates/related parties of the persons mentioned above. However, several exemptions have been granted from such disqualifications for persons who are ‘financial entities’ (as defined in the Code) and not a related party of the Corporate Debtor.

The CIR Process and the subsequent liquidation process presents a unique opportunity for foreign investors to acquire a distressed Indian company or its assets. FEMA, FEMA 20 and the FDI Policy (collectively, “FDI Laws”) do not prescribe a special or a separate regime for making investments in distressed companies undergoing the CIR Process, therefore a foreign investor seeking to acquire or make investment in a distressed company undergoing the CIR Process or in liquidation is required to comply with various procedural and other requirements under the FDI Laws, in addition to complying with the requirements under the Code.

Two routes for FDI

FDI may be either under the “automatic route” or under the “approval route”, depending upon the business sector in which the investee company is engaged in and in certain cases the shareholding percentage being obtained by the foreign investor in the investee company. Automatic route does not require prior approvals from the Government of India for FDI but certain specified post-investment filings are required to be made. Approval route requires prior approval from the Government of India (through the concerned administrative ministry/department) and/or RBI, for FDI.

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