30th October 2020

Confidant Classes

A Premier Judicial Service Coaching

FDI amendment in the wake of takeover threat

Introduction: On April 17, the Department for Promotion of Industry and Internal Trade (DPIIT) has amended the Foreign Direct Investment (FDI) policy by Press Note No. 3 (2020 Series) for curbing ‘opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic. This decision came at the back of People’s Bank of China (PBoC) raising its stake from 0.8 per cent to 1.01 per cent in India’s largest non-banking mortgage provider HDFC. It was a shock, and many questioned the buying by Chinese entities at a time when the world is facing its worst economic crisis.

Amendment

Revised RulePrevious Rule
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 a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.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.Earlier, 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.
FDI Amendment 2020 & Previous Rule

What does it mean?

  • The new amendment requires that certain investments pass only by government approval, not direct investments. In other words, with the new amendment, FDI in these cases would require the approval of the Indian government, which would mean that the government could monitor the scale of these investments and give its approval, if it so decided.
  • The takeover that is aimed at being prevented is one by entities located in 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.
  • India shares its land borders with Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, China and Afghanistan (although today, this portion of India’s territory has been illegally occupied by Pakistan, which India calls Pakistan-Occupied Kashmir). Of these countries, only one has entities with the financial capability to indulge in takeovers/acquisitions as on date, and this FDI amendment seems to be have entities from this one state alone in its crosshairs — China.

Backdrop:

  • This decision by India is not the first by a state, Australia and several European countries have already put in place concrete plans and measures to stop such opportunistic acquisitions / acquisitions. However, what is interesting is the fact that the Indian government is not concerned today with possible acquisitions of European or American entities. His attention seems to focus rather on entities backed by the People’s Republic of China.
  • China seeks to increase its position in the region and the China-Pakistan economic corridor (which has constantly faced opposition from India) that would give China access to ports is an example of China’s entry into areas too close to further comfort from India. In fact, there are reports that China has increased its investments in infrastructure projects in Pakistan in light of this proposed project.
  • On the Indian front, Chinese investment in India increased from $ 1.8 billion in 2014 to about $ 8 billion to $ 9 billion in 2017. These are not tiny increases in investment. Chinese companies investing in Indian entities during the global pandemic may not be the best idea, as observers argue, as industry members fear that these entities may be supported by the Chinese government to make foray, into global jurisdictions, including India.

Impact: The measure by the Government of India may not be completely protectionist in nature, but could rather be interpreted as a measure that will ensure that no Indian entity is in deficit during this period of the pandemic. India will leave COVID-19 and, in this case, there is absolutely no doubt that it would be in its interest to have the property of its entities intact and under the control of India.

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