REVISION OF FDI POLICY | INDIA RAISING `THE WALL` AGAINST CHINA
In light of the effects of the Covid-19 pandemic, the Government of India (Government) has issued Press Note 3 (2020 series) on 17 April 2020 (Press Note) revising the Government’s position on investments from neighbouring countries and more particularly, regulating Chinese investments in Indian companies. This Press Note will enable the Government to monitor and regulate the Foreign Direct Investment (FDI) coming into the country through Chinese investors.
Prior to this Press Note, according to the Foreign Direct Investment Policy (FDI Policy), a non- resident entity could invest in India, other than the sectors / activities which are prohibited. However, citizens of / entities incorporated in Bangladesh could invest in India through the government route only. Further, citizens of / entities incorporated in Pakistan, could invest in India only through the government route in all sectors other than defence, space, atomic energy and other activities / sectors prohibited by the Government.
After the Press Note, the major change brought about by the Government in the FDI Policy is, that any entity of a country with whom India shares a border or where the beneficial owner of an investment into India is situated in or is a citizen of such country, that entity / individual can only invest in India, through the government route, irrespective of the sector that the investment is in.
The Government further clarified the above by explaining that, in the event of transfer of ownership of any existing or future FDI in an entity in India, either directly or indirectly, resulting in the beneficial ownership falling within the purview of the above paragraph, such investment would also require government approval.
While from the looks of it, this Press Note targets all of India`s neighbouring countries, we believe that the effect of this would be felt greatly by the Chinese companies as it is only Chinese entities which have the financial capability to enter into takeovers/amalgamations/mergers concerning Indian companies.
India has applied the revised FDI Policy across all sectors and not only the ones which were considered to be `sensitive` sectors. Further, the Government, in the Press Note has not made any distinction between majority/control investments or minority or passive investments. This can be further explained by the fact that after this Press Note, all international transactions of Chinese investors with global companies, who have an Indian subsidiary, would additionally require prior approval of the Government. This is so, as the beneficial ownership of the Indian company, will be deemed to have been transferred to the Chinese investor as a result of the takeover of the global company.
Existing FDI made by Chinese investors is not covered in the Press Note. The Press Note only covers new FDI by Chinese investors in India. This would mean that if a Chinese investor wanted to infuse capital in any of its Indian subsidiaries, prior Government approval would be required.
Prior to this Press Note, according to the Foreign Direct Investment Policy (FDI Policy), a non- resident entity could invest in India, other than the sectors / activities which are prohibited. However, citizens of / entities incorporated in Bangladesh could invest in India through the government route only. Further, citizens of / entities incorporated in Pakistan, could invest in India only through the government route in all sectors other than defence, space, atomic energy and other activities / sectors prohibited by the Government.
After the Press Note, the major change brought about by the Government in the FDI Policy is, that any entity of a country with whom India shares a border or where the beneficial owner of an investment into India is situated in or is a citizen of such country, that entity / individual can only invest in India, through the government route, irrespective of the sector that the investment is in.
The Government further clarified the above by explaining that, in the event of transfer of ownership of any existing or future FDI in an entity in India, either directly or indirectly, resulting in the beneficial ownership falling within the purview of the above paragraph, such investment would also require government approval.
While from the looks of it, this Press Note targets all of India`s neighbouring countries, we believe that the effect of this would be felt greatly by the Chinese companies as it is only Chinese entities which have the financial capability to enter into takeovers/amalgamations/mergers concerning Indian companies.
India has applied the revised FDI Policy across all sectors and not only the ones which were considered to be `sensitive` sectors. Further, the Government, in the Press Note has not made any distinction between majority/control investments or minority or passive investments. This can be further explained by the fact that after this Press Note, all international transactions of Chinese investors with global companies, who have an Indian subsidiary, would additionally require prior approval of the Government. This is so, as the beneficial ownership of the Indian company, will be deemed to have been transferred to the Chinese investor as a result of the takeover of the global company.
Existing FDI made by Chinese investors is not covered in the Press Note. The Press Note only covers new FDI by Chinese investors in India. This would mean that if a Chinese investor wanted to infuse capital in any of its Indian subsidiaries, prior Government approval would be required.
MHCO Comment: The objective of this Press Note seems to curb opportunistic acquisitions in the Indian companies, in light of this pandemic (Covid-19) where the share prices of several blue chip companies have fallen by more than 50% in last 2 months. Complimenting this Press Note, the Securities and Exchange of Board of India (SEBI), also put investments by China and Hong Kong in Indian companies under scrutiny. These efforts to seal the so- called commercial borders of India, come in the light of similar protective and precautionary measures taken by Australia, United States of America, Spain, Germany, Italy and other European countries. While imbibing the essence of measures taken globally, the Press Note has not clarified the term beneficial ownership, neither has it defined the ambit or the method of computation of beneficial ownership. Clarifications from the Government in this regard of awaited.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.
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