India is looking at a clean energy future. Its present, meanwhile, needs more refining and petrochemical capacity than its public sector oil companies can fund. Demand for fuels and petrochemicals is still growing, and the State-owned refiners have announced both expansions and greenfield complexes. The government has signalled that foreign strategic partners are welcome, and the foreign direct investment regime has been liberalised accordingly. Policy is the easy part, counterintuitive as it may sound. The constraints that actually shape a strategic investment sit elsewhere. This article looks at what those constraints are and at how an investor can limit its exposure to them. These constraints span the PSU cap, land-border screening, merger control, land and pipeline access, and offtake regulation, each on its own timetable and authority and the decisions that matter are often made earlier than they appear.
At first glance, India’s foreign direct investment policy for petroleum refining looks both straightforward and liberal. In terms of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) a foreign refining company can set up a wholly owned subsidiary in India under the automatic route.
A second capped, conditional regime runs parallel to this. Where the refining is carried on by a domestic public sector undertaking (“PSU”), foreign investment is capped at 49% (under the automatic route) so long as there is no disinvestment or dilution of domestic equity. The one exception is a PSU for which the government has granted in-principle approval for strategic disinvestment, where 100% foreign investment is permitted [Para 5.2.4.3 of the FDI Policy inserted vide Press Note No. 3 (2021 Series), issued by the DPIIT on July 29, 2021]. It is this regime that shapes how investments are structured in joint ventures with PSU, be it board composition, allocation of affirmative vote items/ reserved matters between the Indian PSU and the foreign partner and the ever-present danger of the “control” tripwire. Why does this matter? Because, most of the refinery and petrochemical capacity currently on offer to foreign strategic investors sits inside PSU balance sheets or PSU-anchored joint ventures, not standalone private refiners.
Then there is Press Note 3 (2020 Series). When issued, it mandated prior government approval for any investment by an entity from a country that shared a land border with India or was beneficially owned there. The ownership structure therefore assumed particular significance in consortium bids and fund-promoted vehicles, and a pre-investment trace of the shareholding pattern and the entire chain of ownership became a sine qua non. In a slight recalibration, Press Note 2 (2026 Series) set a 10% beneficial-ownership threshold, thereby allowing non-controlling land-border exposure below it under the automatic route. As a result, the restriction under Press Note 3 of 2020 stays, albeit with a newly prescribed percentage threshold. The relief, in other words, is percentage-based; the restriction itself is not, and approval is still required wherever a land-border person can control the investor, whatever its economic stake.
Moving away from FDI, the acquisition of the equity stake by itself will, in most cases, require clearance from the Competition Commission of India (CCI). A refining or petrochemical complex of the scale on offer would ordinarily meet the traditional asset and turnover thresholds in Section 5 of the Competition Act, 2002. Even where it did not, the Competition (Amendment) Act, 2023 introduced a deal value threshold under Section 5 (d) of the Competition Act, 2002, whereby, transactions valued over INR 2,000 crore require notification to the CCI. This becomes a condition precedent, and therefore sets the closing timetable. There is a further wrinkle: the 2023 amendment defines control as material influence over management or strategic decisions [Section 6(c) of the Competition (Amendment) Act, 2023], a bar that is lower bar than the FDI test. So, arrangements clearing the FDI tripwire may still amount to control for the CCI, including offtake, as examined in detail in Part 2.
Foreign investment is governed by a central legislation, but the actual refinery project is another matter. A refinery complex of the kind that would appear attractive to multinational petroleum majors presupposes contiguous tracts of land often stretching to thousands of acres. Land is a “State Subject” under the Constitution of India. Therefore, the State allots it.
A State can allocate land for a project by two different legal routes, and each comes with its own complications. The first is acquisition under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (“LARR Act”). The LARR Act has its own procedural safeguards, for instance, social impact assessment, the prior consent of 70–80% of the affected families, and a rehabilitation and resettlement scheme. Whether that consent requirement applies at all turns on whether the project company counts as a “government company” under the Act — which, in turn, depends on the equity split negotiated under the 49% PSU cap discussed above. Then there are political considerations. A project once cleared and land-allocated under one government can face renewed local opposition, revisiting of terms, or simply dithering by the successor government. Should that happen, courts are reluctant to intervene given that land allotment has long been treated as a policy matter within the state’s discretion. This risk has been proven to be large enough to derail major hydrocarbon projects in India and it can neither be structured around nor litigated out of.
By way of illustration, a USD 44 billion refinery and petrochemical project was promoted by Ratnagiri Refinery and Petrochemicals Limited, a joint venture of Indian public sector oil companies with foreign strategic partners. It was originally sited at Nanar in Ratnagiri and covered villages on its neighbouring Sindhudurg district. The acquisition notifications were issued sustained local opposition followed and pursuant to a realignment of political equations of the state, the Nanar siting was abandoned in favour of Barsu in the same district. Here too, it encountered local resistance. At the time of writing the project has not moved to implementation at Barsu. The State cannot be faulted here, having used its discretion not once but twice in allocating land.
The lesson learnt is to know exactly the stage when resistance/ opposition enters the process, because it is law that leaves the door open. A refinery project is a development project requiring prior environmental clearance and the EIA for a project has public consultation built into it, in which local concerns are formally recorded and responses sought. How this process is handled determines the fate of the project.
The second route is allotment by a State industrial development corporation out of land it holds or acquired by it under its own statute. In Maharashtra, it is the Maharashtra Industrial Development Corporation (MIDC) established under Section 3 of the Maharashtra Industrial Development Act, 1961.This route is no doubt quicker and comes with a lighter set of procedural safeguards when compared to the LARR Act, but comes with its own conditions. MIDC for instance, allots the land by way of a long-term lease (95 years) with development timelines, user restrictions and most importantly prior approval for restructuring, change in constitution or change of control of the lessee and lock-in of shareholding. Thus, a proposed equity investment in a company that is located on a state corporation allotment and which results in change of control would require prior approval as a condition precedent.
The closer one looks at strategic investment in India’s downstream refining sector, the clearer it becomes that liberalised FDI is only the starting point. The 49% PSU-related cap and control sensitivities, CCI clearance, the choice and security of the land-allotment route, and the environmental and state- level approvals that follow must all be addressed before the investment is capable of closing or the project is capable of proceeding. What then is the investor to do?
For starters, it must identify these constraints early and make the necessary approvals and consents conditions precedent. Whether the investment structures built around them can limit capital exposure when land, political or regulatory risk materialises is a separate question, and is the subject of Part 2 of this series.
About the author: Chandrasekhar G. Tampi is a Partner at Luthra and Luthra Law Offices India.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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