Even the minute investment from countries sharing land border with India shall require prior approval from government…??? Impact on Indian Economy.

It is expected that the government will soon issue more stringent guidelines w.r.t investment from countries sharing land border with India. Amid Covid-19 and rising tensions at the India-China border, government held an internal meeting wherein apprehensions on investment from China have been discussed and it is probable that instead of switching to government route, it would be mandatory to seek approval even for miniscule investment. This move aims at tightening rules for investment flows from China against the backdrop of border tensions.

Earlier this year in April, the government had issued a press note on FDI regulations in India with an intention to curb opportunistic / hostile takeovers of domestic firms in India which are grappling with challenges amid Covid-19. The regulation states that the beneficial owner of an FDI investment in India that is resident of a country that shares a land border with India shall have to follow the government route for effecting FDI investments in India.  A beneficial owner refers to the ultimate owner / person who ultimately has voting rights. Thus, any entity whose ultimate ownership vests with any person who is a resident of or citizen of any country sharing land border with India shall require government approval in case such person holds > 25% stake in the investor entity. Chinese investors have poured about $6 billion into Indian start ups over the past 2 years but now these companies shall be subject to tougher scrutiny.

India Flag & Chinese flag

Currently, India is facing its worst economic contraction in history. Indian economy had contracted by a record 23.9% in the April-June quarter and is estimated to shrink further by 10.3% this year in the wake of Covid-19. The consequences of probable guidelines would further deteriorate the economic recovery. Though government has constantly implemented reforms in direct and indirect taxation, FEMA and so on to lure the foreign investors, such restrictions may exhaust the public confidence and certain nations may even view India as unfriendly to the outside World. Further, it is not just new investment that may be at risk. The report may also arouse concerns over the safety of China’s existing investments in India. If India’s policymakers take extreme step of targeting Chinese investments, confidence in India’s ability to maintain basic economic order and guarantee the safety of foreign investment will be devastated. And that will be a real blow the Indian economy cannot afford.

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