On April 17, 2020, the Ministry of Commerce & Industry issued Press Note 3 to amend the Foreign Direct Investment (FDI) Policy, 2017 with an apparent objective to discourage hostile and opportunistic investment in Indian companies by neighbouring countries amid the COVID-19 pandemic.
There are two routes by which Indian entities receive FDI - (i) automatic route, under which FDI is allowed without prior approval of the government; and (ii) Government route, under which prior approval of the government is needed.
As per the amendment, investment from a country which shares a 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, shall invest only under the government route, regardless of the sector or activities in which such investment is being made.
The investments from seven countries - Pakistan, Afghanistan, China, Nepal, Bhutan, Myanmar and Bangladesh are under the scope of this Amendment. Earlier, similar requirements were placed for investors from Bangladesh and Pakistan. However, now investors from all neighbouring countries require clearance from the government prior to investing in Indian entities.
Though there is no mention of any specific country in the amendment, its impact on Chinese investors is clear. This amendment also applies if the beneficial owner of the investment is an entity situated in or is a citizen of the neighbouring countries, thereby covering indirect acquisition of and investments in Indian entities within its scope.
Backdrop of the Amendment
At the outset, the increase in vigilance and restrictions against Chinese investments in India was suggested by the Indian Council of Investors (ICI), an investor association group, to the Ministry of Finance. ICI appealed to initiate a strong approval-based regime for both FDI and Foreign Portfolio Investment (FPI) rules, where the investment crosses a certain threshold.
Further, the timing of China’s central bank raising its interest in Housing Development Finance Corporation (HDFC) raised serious concerns since the dip in HDFC’s share price was evidently caused due to the Coronavirus-led slowdown in the economy.
On April 11, People's Bank of China (PBC) raised its stake in HDFC Bank to 1.01 percent from 0.8 percent. Various media reports also cited that Ministry of Finance was ruffled as market regulator, SEBI had not raised red flags when PBC was buying shares in HDFC.
No law currently restricts central banks of other countries from investing in Indian commercial entities. However, this move by PBC is unusual considering that central banks typically buy bonds of companies in other countries, and not equities.
Investments by Chinese companies and institutions have attracted widespread scrutiny from all over the world since the beginning of this pandemic. As COVID-19 continues to threaten lives and livelihoods across the globe, businesses and their assets are not reflecting their true value, thereby becoming attractive targets for hostile takeovers and acquisitions.
In the wake of fear that Chinese companies may buy assets at low valuations, various nations such as Japan, Australia, and the US have taken protective positions against foreign investments. Many European countries such as Germany, Spain and Italy have also reviewed their investment norms with regard to possible takeover of their strategic assets by Chinese entities which may take advantage of the economic slump to raise their stakes in the global economy.
The term ‘beneficial owner’ has been defined under Prevention of Money Laundering Act, 2002 and the term ‘significant beneficial owner’ is defined under the Companies (Significant Beneficial Owners) Rules, 2018, however the threshold limits and scope under these definitions are different. Therefore, there is a dire need to define ‘beneficial ownership’ in the context of assessing potential investment for the government approval as proposed by the amendment.
Further, the grey area extends to whether these requirements apply to investments made through different routes like FPI and FVCI, leaving several aspects of the amendment unclear. Ostensibly, it appears that these changes will not affect the FPI route, unless SEBI and RBI take a call on it.
Nonetheless, market regulators must closely monitor share transactions and investments by foreign companies and institutions, especially in times when market valuations are at historical lows. The notification under FEMA which brought the amendment into effect on April 22 has not clarified these concerns.
China has accused India of discriminatory practices and demanded revision in the changes brought in by the amendment. Ji Rong, a spokesperson for the Chinese embassy, said,
“the barriers set by the Indian side for investors from specific countries violate WTO’s principle of non-discrimination and go against the general trend of liberalization and facilitation of trade and investment...We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment.”
However, the Union Ministry of External Affairs has not responded to the Chinese embassy’s comments yet. Given the increasing penetration of Chinese investors in the Indian start-up and technology ecosystem, it will be interesting to see if and how India justifies its move to achieve a win-win situation.
To sail through the slowdown-hit economy, the amendment comes across as a step in the right direction. However, there are uncertainties involved in the execution of the amendment which may disadvantageously impact the Indo-China relationship in the global market.
While announcement of Facebook-Jio deal strengthens India’s image as a destination for FDI on one hand, this amendment tightens investment norms on the other, creating more vagueness on India’s FDI screening mechanisms.
The amendment has raised numerous pressing concerns, but it is pertinent to understand that it does not per se restrict investments from neighbouring countries, but only adds the requirement of taking prior government approval.
Indisputably, investment during this time of economic disruption is beneficial, and such a move appears to be a step to safeguard the national interest. The amendment seemingly prevents Indian companies from being exposed to hostile and opportunistic takeovers.
However, these companies need further financial support to survive in the market. Taking cues from Australian government, the Indian government must also endeavour to provide financial support through economic stimulus packages and economic rescue programmes. While work is being done to contain the Coronavirus, these packages will ensure that businesses are able to keep running.
The author is an Associate at SR Law Practice.