Government of India changes FDI Rules to curb opportunistic takeovers of Indian Companies.

Change in Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic

During the ongoing global pandemic of COVID—19, stock markets across the world had crashed. Indian markets were not an exception to this. This resulted in many stocks available at attractive valuations. Many Chinese entities, yes, the same China which had gifted COVID-19 to the World, are on a spree of buying shares. Recently a news has surfaced that China’s central bank, People’s Bank of China (PBOC), has bought nearly 1.01 percent stake in HDFC Ltd on behalf of the Chinese sovereign wealth fund SAFE. This has raised eyebrows and many had demanded restrictions on Chinese investment in Indian Companies.

The Government of India, acting swiftly, has reviewed its Foreign Direct Investment (FDI) policy for curbing such opportunistic takeovers/acquisitions of Indian companies. The Ministry of Commerce & Industry through its Press Note No. 3(2020 Series) dated 17.04.2020 have now amended FDI Policy, 2017. The changes are tabulated as under:

Pre-Amendment Post Amendment
Para 3.1.1

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 or an entity incorporated in Bangladesh can invest only under the Government route.  Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

3.1.1(a)

A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of 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, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

 3.1.1(b)

In the event of the 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 the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.

Analysis:

Ø  Citizens or entities incorporated in Afghanistan, Bhutan, China, Myanmar and Nepal were able to make investment in Indian Companies under automatic route as per extant FDI policy.

Analysis:

Ø   All investment by citizens or entities incorporated in countries like Afghanistan, Pakistan, Bangladesh, Bhutan, China, Myanmar and Nepal can make investment in Indian Companies under Government Approval Route.

Ø  Further, if the beneficial ownership of investment in India is situated in any of the aforementioned countries, then such investment is also required to be made under Government Approval route.

Ø  The changes are applicable to both direct investment as well investment through transfer of shares by Citizens of the aforementioned countries, Entities incorporated in the aforementioned countries or Entities in which Citizens or Entities of aforementioned countries have beneficial interest.

Disclaimer: Views expressed in the article are personal views of the Author. No opinion should be formed or any decision made based on the content of this publication. I shall not be responsible for any liability arising from any statements or errors contained in this publication.  

The author is a Practicing Chartered Accountant, Registered Valuer (SFA), qualified CPA(USA), qualified Independent Director having experience spanning more than 10 years in Direct Taxation, FEMA, Valuation – Advisory, Compliance and Representation service. He can be reached at 9145687573, rvamolbongale@gmail.com

Author Bio

Qualification: CA in Practice
Company: Amol Bongale & Co.
Location: Thane, Maharashtra, IN
Member Since: 05 Apr 2020 | Total Posts: 3
I am a Chartered Accountant, Registered Valuer (SFA), qualified CPA(USA), qualified Independent Director having experience spanning more than 10 years in Direct Taxation, FEMA, Valuation advisory, compliance and representation service . View Full Profile

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