Introduction

The Department for Promotion of Industry and Internal Trade, the Ministry of Commerce and Industry, Government of India (DPIIT) vide Press Note No. 3 (2020 Series) dated April 17, 2020 (“Notification”) has amended para 3.1.1 of the current ‘Consolidated Foreign Direct Investment (FDI) Policy, 2017’ (FDI Policy) to curb opportunistic takeovers/acquisitions of Indian companies due to COVID-19 pandemic. The same appears to be a protectionist reaction by the Government in light of the recent event of China’s central bank buying 1.01 per cent stake in HDFC.

Current position with regard to FDI for bordering nations

The existing FDI Policy states that a non-resident entity can invest in India except in those sectors or 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 or activities other than defense, space, atomic energy and sectors/activities prohibited for foreign investment. The position was not the same for Chinese individuals or entities and they were allowed to freely invest in India and Indian companies provided the FDI Policy in the sector permitted so. However, being apprehensive about the state of other nations and seeing the first move in case it appears the DPIIT in a considered move brought the Notification.

Summary of the Notification

The Notification revises the extant FDI Policy and provides that a non-resident entity can invest in India, except in prohibited sectors or activities. However, the entities and/or citizens of the neighbouring countries i.e. Bangladesh, Pakistan, China, Nepal, Myanmar, Bhutan and Afghanistan sharing land borders with India, can make investment in India only after receiving the Government approval. It continues to debar the entities and/or citizens of Pakistan from making investment in defence, space, atomic energy and other prohibited sectors/activities. It further provides that any subsequent change (directly or indirectly) in the beneficial ownership of the entities and/or citizens of the aforesaid neighbouring countries would also require Government approval.

Accordingly, any fresh infusion of funds or exit from the existing investments, directly or indirectly, by the entities and/or citizens of the aforesaid neighbouring countries will be subject to Government clearance irrespective of the percentage of the FDI permitted via automatic route.

Other aspects

The Notification does not cover any aspects relating to the scene of investment and we assume that existing investments of any Chinese entities will not be affected. However, the same may not be the case with downstream investment and Chinese entities who have already invested in Indian companies may have to seek prior approval from the Government before investing in the capital instrument of another entity. It is important to note that the Government approval would also be required in multi-layered transactions irrespective of the level at which the investment is made by the entities and/or citizens of the aforesaid neighbouring countries.

The WTO angle and threat of Chinese retaliation

There is no doubt about the aspect that the Chinese will approach the dispute forum under the World Trade Organization (WTO) under the aspect of signatory parties to be ‘non-discriminatory’ with regard to like products and services. It may also affect several like businesses wherein Indian companies may be restricted from properly functioning in China. It is important to note that a lot of Indian companies may also be restricted from directly investing in Chinese entities which may severely hamper their production and services.

Conclusion

However, a non-functional WTO is least of Indian Government worries at the moment and in the near future systematic assets such as ports, electricity sector, infrastructure etc. may be prevented not only from Chinese investments but investments by other large countries. While, the measure may auger well for India currently, China which has the largest flow of FDI investment in India may also start pulling back some of its strategic investments thereby hampering essential items in the economy. Hence, the Government should shore up its domestic production so as to not be heavily reliant on any country including China for investment.

The Notification will only take effect after it has been notified as per the Foreign Exchange Management Act, 1999.

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Mr. Rohitaashv Sinha, is an Associate Partner with Agarwal Jetley & Co. (AJC), a law firm based in New Delhi.  He has over 12 years of experience. His practice has been particularly focussed on corporate and commercial laws, foreign investment laws, mergers & acquisitions, joint ventures, labour and employment laws and regulatory issues. He is also actively involved in pro bono services on behalf of various NGOs. Mr. Sinha is an alumnus of ILS LAW COLLEGE, PUNE and received his BSLLB degree from Pune University in 2008. You can reach him at rohitaashv.sinha@agarwaljetley.com

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