News Excerpt
The Department for Promotion of Industry and Internal Trade under the Ministry of Commerce and Industry released an amendment of the Foreign Direct Investment Policy. The Government of India has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.

Pre-Connect
FDI Policy in India: Investment climate in India has improved considerably since the opening up of the economy in 1991. This is largely attributed to ease in FDI norms across sectors of the economy. India, today, stands at 63rd position on the World Bank’s Ease of Doing Business (EoDB). Following are the routes of FDI investment in India:
1.    Automatic Route: Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the Government of India for the investment.
2.    Government Route: Under the Government Route, prior to investment, approval from the Government of India is required. Proposals for foreign investment under Government route, are considered by respective Administrative Ministry/ Department.

Highlights
•    The government has reviewed the extant FDI policy in order to curb the opportunistic takeovers/acquisitions of Indian companies due to the current pandemic.
•    In a move that will restrict Chinese investments, the Centre has made prior government approval mandatory for foreign direct investments from countries which share a land border with India. Previously, only investments from Pakistan and Bangladesh faced such restrictions.

Earlier Position
    The present position as per the policy states that a non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
    However, a citizen of Bangladesh and Pakistan or an entity registered in both countries can only invest under the government route. Additionally, for Pakistan-sectors/activities such as defence, space and atomic energy are prohibited for investment in addition to the sectors/activities already in that category.

New Changes
    The amended para 3.1.1 (a) states that an entity of 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 can invest only under the government route.
    The additional prohibitions for Pakistan still hold. Additionally, the amendment also states that the transfer of ownership of an existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1 (a), the change will also require government approval.
    India shares land borders with Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh and Myanmar. Investors from countries not covered by the new policy only have to inform the RBI after a transaction rather than asking for prior permission from the relevant government department.

Analytica
    The government has not banned foreign investment from China. It has only put a filter to have an oversight to examine the implications of the investment, alarmed by the People’s Bank of China raising its stake in the country’s largest mortgage lender, HDFC Ltd, from 0.8% to 1.01% through open-market purchases in the March quarter.
    The move led to concerns that India’s most valued companies could be susceptible to hostile takeovers as their market values have taken a severe hit because of covid-19-related uncertainties.
    The note by DIPP makes clear its objective is to curb opportunistic takeovers or acquisitions due to the current COVID-19 pandemic. This is a likely reference to the possibility of Chinese investors purchasing undervalued shares of Indian-listed companies. This is indeed a risk that has also been identified by other countries.
    A plain reading of the amended policy makes every type of investment by Chinese investors subject to government approval. It neither distinguishes between greenfield and brownfield investments nor listed and unlisted companies.
    It also does not distinguish between the different types of investors, such as industry players, financial institutions, or venture capital funds. Such a blanket application could create unintended problems.
○    It is likely that unlisted or private companies might find themselves under financial stress due to the COVID-19pandemic.
○    An acquisition in such companies can only occur between willing buyers and sellers. Making government approval necessary for acquisitions in private companies by Chinese investors will only reduce the number of potential investors available for a prospective seller, and drive down the valuation.
○    The absence of a white knight may cause bankruptcy and job losses. Greenfield investments are another category where the new rules may pose obstacles.
○    These are investments where Chinese investors bring fresh capital to establish new factories and generate employment in India. China has been the fastest growing

source of FDI since 2014.
○    The positive sentiment generated among industry players in China since then may well be punctured by the need for government approval.
    Moreover, the most visible ‘Chinese investors’ in India, most in the Internet space, may not even come under the definitions of the new rules. Most investors in companies such as Zomato, Swiggy, Bigbasket, Makemytrip, Oyo, Ola and Snapdeal are either venture capital funds registered in off-shore tax havens or listed in stock exchanges in the U.S. or Hong Kong.
    It will prove to be extremely difficult to attribute nationality to venture capital funds or fix the ultimate beneficial ownership of listed companies down to founders of a certain nationality.

Conclusion
The government’s effort to ring fence Indian industry from opportunistic acquisitions by China may dry up access to Chinese investments in the post-covid-19 world. According to some experts the change in FDI rule is too drastic a move and could potentially end the growth of the booming startup ecosystem in India.
The government should lay out a clear roadmap for the approval process for investments from Chinese companies. It should ensure that proposals are considered in a time-bound manner and restrictions should not have any adverse impact on bonafide investments in these challenging times, wherein Indian companies are in need of funds.

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