FDI Policy: Investors From Border States Need Government Approval To Invest In Indian Companies

India adds restriction for FDI investment from China and other neighboring countries.

A sun sets behind a barbed-wire fence. (Photographer: SeongJoon Cho/Bloomberg)  
A sun sets behind a barbed-wire fence. (Photographer: SeongJoon Cho/Bloomberg)  

In an attempt to curb opportunistic takeovers or acquisitions of Indian companies made vulnerable due business disruption and falling stock prices on account of Covid-19 pandemic, the government has revised the foreign direct investment policy. The changes are in line with protective positions taken by many European countries and seem to be primarily aimed at restricting foreign investments from China, especially in critical industries, experts told BloombergQuint.

India’s FDI policy allows foreign investment in certain sectors under the automatic route and up to the limit set out in that sector. For instance 100 percent FDI is permitted under the automatic route in manufacturing, oil and gas, greenfield airports, construction, railway infrastructure etc. In other sectors, FDI is allowed under the automatic route upto a certain threshold, say 26 or 49 percent, and any further foreign investment then requires government approval. Such conditions apply to defence, broadcast and print media, aviation and other sectors. There is also a list of prohibited sectors, such as lottery, cigarettes, atomic energy.

The government has now narrowed the scope of eligible investors.

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 countries. India shares a land border with China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan.

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.

The government will need to issue certain clarifications for existing investments from restricted countries, Vaibhav Kakkar, partner at L&L Partners said.

For instance, he pointed out, while it is likely that existing FDI would be grandfathered, it is unclear if existing shareholders from China 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.
Vaibhav Kakkar, Partner, L&L Partners

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, he added.

To be clear, the changes have been made only to foreign direct investment and not 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. Recently, China’s central bank had increased its stake to 1.01 percent in Housing Development Finance Corporation Ltd. via the FPI route.