Right move to protect interest of Indian firms and their stakeholders through FDI restrictions by GoI

The constantly increasing Covid-19 pandemic has cast a shadow on the Indian and as well as global economy, which was already reeling under pressure by the US-China trade war.

This shock comes at a particularly unfortunate time for India, as the economy was already on a downtrend since the turn of FY 2018-19. More specifically, on a quarterly basis, India’s growth rate fell from around 8 per cent in Q4 FY18 to a new low of 4.5 per cent in Q2 FY20 hurting the prospects of Indian companies and start-ups, which were facing difficulties in raising funds. This situation added with the COVID-19 pandemic may provoke Indian companies to decide on the distress sale of their companies.

Government announced through Ministry of Commerce & Industry, Department for Promotion of Industry and Internal Trade has revised Foreign Direct Investment (FDI) policy vide Press Note No. 3 (2020 Series) wherein it has reviewed and revised FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017.

Emphasis Supplied.

FDI

Earlier Position before the amendment vide Press Note No. 3 (2020 Series)

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.

Revised Position before the amendment vide Press Note No. 3 (2020 Series)

Para 3.1.1: 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.”

According to the said Press Note No.3 of 2020 , an entity of a country, which shares land border with India or where the beneficial owner of an investment is situated in or is a citizen of any such country, can invest only under the government route.

India’s FDI policy change has been trigged by People’s Bank of China’s investment in HDFC, which will impact the Indian eco-system. Indian government amending its Foreign Direct Investment (FDI) policy to get approvals in case of neighbouring countries willing to invest in India, seems to be way to curb Chinese investments in the country.

This policy move by the government has come as a combat effect after China’s central bank recently raised stake in Housing Development Finance Corporation (HDFC) to a little over 1 percent, thereby picking stake in one of the biggest lenders whilst the stock is trading low.

The government as part of its COVID-19 pandemic fighting measures has made the new amendment as an instant reaction to restriction of FDI investment by the government into the Indian companies from the neighbouring countries. It will now require a nod from the government and apparently target investments from China. It may restrict Chinese investors to pick Indian companies at all times valuations. The move may end up harming FDI inflows in future.

The move also attempts to hold any kind of initiatives taken up by Chinese companies to take control of Indian firms which have been affected in the recent past due to Covid-19 global crisis and further lockdown. Though the notification is not restricted to prior approval for direct investments by Chinese firms, it also restricts any transfer of investments and future FDI, resulting in beneficial ownership falling with Chinese firms.

Looking at the present economic situation, it is a measure to protect start-ups and SMEs with low valuations. However, we are waiting for the non-debt rules that the Finance Ministry will bring out in this regard which will trigger requirement and other considerations for foreign investment from neighbouring countries. The notification also seems to have the force of law when necessary amendments are introduced in the system. Other countries such as Australia and in the European Union are also considering similar provisions.

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Sumit Kochar is a corporate lawyer and succession and estate planning coach and his primary areas of expertise include estate and succession planning, advising family offices and UHNIs in business and estate planning , Multi-family office advisory,  specializing in planning of Intergenerational wealth planning and governance, Financial & Tax strategies for assets protection, wealth transfer and tax related issues, mergers and acquisitions, covering structuring, capital markets corporate, foreign exchange and contract law advice and documentation. He is a faculty and speaker at various forum of CA, Chamber of commerce and law colleges as well. The author can be reached out at below details:

Adv. Sumit Kochar | Senior Wealth and Transactions Advisor | Findoc Financial Services Group | E: sumitk@myfindoc.com ; sumit.koc@gmail.com | M: 0091- 9560019659, L: 011- 45542479 | Address-704 & 705, 7th Floor, Ashoka Estate, New Barakhamba Road, Barakhamba, New Delhi – 110001

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Qualification: LL.B / Advocate
Company: FINDOC
Location: New Delhi, New Delhi, IN
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