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Amendment in the FDI rules to shield Indian Companies

July 4, 2020

Foreign Direct Investment (“FDI”) can be from Overseas Individuals, Foreign Companies or Foreign Institutional Investors under Automatic Route or Government Route.

FDI is permitted in all sectors except for those contained in the prohibited list including atomic energy, betting and gambling, lottery business etc. FDI may or may not require prior regulatory approval depending on the government policy in the relevant sector in which investment is proposed to be made.

Automatic Route:

Under this route no Central Government permission is required for Investment in all activities/ sectors which have been specified. To name a few sectors - Industrial Parks, Telecom Services, E-commerce activities, Information & Technology services, Outsourcing & Consultancy services etc., The Indian entity  is required to undertake reporting to the concerned Regional office of RBI through its Authorized dealer within 30 days from the date of issue of capital instruments to a person resident outside India or foreign entity.

Government Route:

FDI in activities not covered under the automatic route require prior Government approval. The sectors which fall under Government route are specified. Some of the sectors are Defence, Pharma, Multi brand Retail Trading etc.,

Amendment in Foreign Direct Investment (FDI) policy

The Government of India has amended the Foreign Direct Investment (FDI) policy in order to shield Indian Companies and curb opportunistic takeovers/acquisitions in Indian companies by neighboring countries in the midst of the coronavirus pandemic.

The amendments are contained in Press Note No. 3 (2020 Series) dated April 17, 2020 issued by the Department for Promotion of Industry and Internal Trade, Government of India, and will become effective from the date on which the principal foreign exchange regulations are amended.

Details of Amendment

Pursuant to the amendment:

  1. all investments by entities incorporated in a "country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country" will require prior regulatory approval;
  2. in the event of any transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of paragraph 1 above, such change in beneficial ownership will also require prior regulatory approval

Countries sharing land borders with India

The following countries share a land border with India:

  • Afghanistan
  • Bangladesh
  • Bhutan
  • China
  • Myanmar
  • Nepal
  • Pakistan

As per  the prior FDI policy a citizen of Bangladesh or an entity incorporated in Bangladesh was allowed to invest only under the Government route. A citizen of Pakistan or an entity incorporated in Pakistan was allowed to invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Bangladesh and Pakistan were already subject to restrictions and pursuant to the latest amendment all neighboring countries including China are now subject to restrictions.

Effect of FDI policy on foreign investment

The notification issued by DPIIT is applicable for FDI. These changes are not applicable to any other form of foreign investment like foreign portfolio investment (FPI) and foreign institutional investment (FII).

Effect of revised policy on China

Several investors and analysts said the move appears to be aimed at China as Nepal, Afghanistan, Bhutan, and Sri Lanka have shown little interest in getting stakes in Indian businesses.

Some of India’s biggest startups including financial services firm Paytm,  e-commerce giant Flipkart,  social media operator ShareChat, and food delivery firm Zomato are backed by Chinese VCs (Venture Capitalists).

HDFC, India’s biggest bank, said earlier this month that Bank of China had raised its stake in the mortgage lender by over 1%.

Effect of investments already made by China

In case of entities where Chinese investors are a major stakeholder, or in case of a wholly owned subsidiary of a Chinese firm, the revised policy may not affect anything – as there will be no change in the ownership of the company. It is important to note that the purpose of these changes in the FDI policy is to prevent hostile takeovers of Indian firms by foreign investors from India’s neighbors, including China.

Prior to this move, the approval of Indian government was required for deals occurring in sensitive sectors such as  atomic energy, defense, space industries, etc., but now as per the revised FDI policy all new investments/changes in beneficial ownership which are connected with individuals/entities that share land border with India will require government approval.

Disclaimer:

The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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