New FDI Rules Bars Investors From Indian Border Nations , Need Government Approval to Invest in Indian Companies.
Modi Govt on 17th April 2020 has Tweaked the Existing FDI Policy to Curb or restrain the Opportunistic Takeovers Or Acquisitions of Indian companies harmed due to business disruption and falling stock prices on account of Covid-19 pandemic.
FDI Policy
India’s FDI Policy allows foreign investment under the automatic route, with or without any limit and under Government Approval Route.
- 100 % FDI– India’s FDI policy allows 100 percent foreign investment under the automatic route in manufacturing, oil and gas, greenfield airports, construction, railway infrastructure sectors.
- Limited FDI– In other sectors, FDI is allowed under the automatic route upto a certain threshold, say 26 or 49 percent.
- Government Approval- Any foreign investment in defence, broadcast and print media, aviation and other sectors, requires government approval.
- Prohibited Sectors- There is also a list of prohibited sectors, such as lottery, cigarettes, atomic energy.
The government has now narrowed the scope of of eligible investors.
Why FDI Policy has been modified 2020?
- The government has tightened its foreign direct investment (FDI) policy to restrict Neighboring Countries Firms from acquiring stake in Indian companies.
- The changes are made with protective positions taken by many other European countries and seem to be primarily aimed at restricting foreign investments from China, especially in critical industries.
- Even before the revision, investments from Bangladesh and Pakistan, which share borders with India, had to undergo government scrutiny.
- India has been increasingly becoming an attractive destination for Chinese investors. China investments in India spans across sectors with significant ones in mobile and related technologies and products, automobiles, and financial technologies.
- Indian start up ecosystem is also seeing lot of Chinese investments.
Presentation & Requests form Indian Companies.
There has been several instances where Chinese investments in India were opposed by Indian companies and groups like RSS-affiliate Swadeshi Jagaran Manch (SJM) etc.
- The fear is partly due to the concerns arising from other countries where Chinese investments in the time of COVID-19 are seen as an attempt to take over national assets at a time of crisis.
- Recently, China’s central bank had increased its stake to 1.01 percent in Housing Development Finance Corporation Ltd. via the FPI route.
- Associations representing MSMEs have been urging government to stop Chinese investments into domestic firms.
- There is an increasing interest among Chinese firms to invest in Indian MSME
What is the Major Change in FDI Policy in 2020?
- It has stated that entities from countries which share a land border with India will now be permitted to invest only under approval route.
- This restriction will also apply if the beneficial owner of the investment is an entity situated in or a citizen of such land border countries.
- The rules have been tightened not just for fresh but existing FDI as well.
- Transfer of ownership of any existing or future FDI where the direct or indirect beneficiary is from these countries will also require government approval.
- To be clear, the changes have been made only to foreign direct investment and not foreign portfolio investment (FPI) rules.
Which countries are Land Border countries of India?
India shares a land border with
- China
- Pakistan
- Bangladesh
- Nepal
- Myanmar
- Bhutan
- Afghanistan
Even before the revision, investments from Bangladesh and Pakistan, which share borders with India, had to undergo government scrutiny.
What is foreign portfolio investment (FPI) rules ?
Any investment of less than 10 percent of the total paid up capital of a listed company is treated as an FPI.
Effective date of Change in FDI Policy?
The amendment in FDI Policy will take effect from the date of Foreign Exchange Management Act (FEMA) notification.
Pending Clarifications from government for Some related Issues in FDI Policy Amendment
The government will need to issue certain clarifications for existing investments from restricted countries.
- It is doubtful if existing shareholders from Countries would be permitted to subscribe to a rights issue for maintaining their pro rata shareholding in a company.
- Further, the position with respect to investments through special purpose vehicles is ambiguous.
- It needs to be seen whether beneficial ownership of less than 49 percent in restricted countries would suffice or the control would also need to be remain with persons from non-restricted countries.
- Additionally, it’s unclear if investments from Hong Kong would be differently or similarly treated to investments coming from China.
- For instance, rules on establishment of Branch or Project Office treat China and Hong Kong as different but for certain trade-related guidelines, they are treated the same.
Negative Aspect of Change in FDI Policy
As each and every aspect has its pros and cons.
- The restrictions on green field investments will impact India’s Make in India plans as the country has been wooing Chinese firms like mobile manufacturers to set shop in the country and reduce imports from China.
Government Notification for FDI Policy.
The change of paragraphs in the FDI Policy is as follows:
| Present Position | Revised Position
|
| 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.
|
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
|
DISCLAIMER: The entire contents have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all or any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document. Reader should seek appropriate counsel for their own situation. I shall not be held liable for any of the consequences directly or indirectly.
Any other suggestions /opinions are welcomed.
Regards
New FDI Rules Bars Investors From Indian Border Nations , Need Government Approval to Invest in Indian Companies.Author: CS Megha Sharan (Company Secretary in Practice)
Contact No 9650082009
Email: ezzusindia@gmail.com
Ezzus India Team
Comment here