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Business

One Eye on China, Modi Govt Tweaks FDI Policy to Curb 'Opportunistic Takeover' of Indian Companies

'An entity of a country, which shares land border with India...can invest only under the Government route.'

New Delhi: The Narendra Modi government will revise India’s foreign direct investment policy to curb “opportunistic takeovers or acquisition” of Indian companies due to the COVID-19 pandemic.

The new rules are primarily aimed at non-resident entities that are from countries that share a land border with India. This includes China and other nations such as Nepal, Bhutan and Myanmar.

Over the last few weeks, investor concerns over the global pandemic have caused stock and asset prices to plummet, sparking fears that some Indian companies may be vulnerable to pressures from overseas lenders and takeover attempts by deep-pocketed foreigners.

In a Department for Promotion of Industry and Internal Trade (DPIIT) file note dated April 17, the government now looks to change this.

“The Government of India has reviewed the extant FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017…,” the note states.

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According to the note, the current policy position is that all non-resident entities can invest in India subject to the existing FDI policy, except in those sectors/activities which are prohibited. Additional restrictions were only placed only on citizens and corporate entities from Bangladesh and Pakistan.

Now, any entity of 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, can invest only under the government approval route.

The change of paragraphs in the FDI Policy is as follows:

Present 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.

Revised Position

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

The new restrictions will apply to countries such as China, Nepal, Bhutan and Myanmar. The DPIIT note say that the decision will “take effect from the date of FEMA notification”.

It is possible that the recent open market purchase of a small amount of shares of HDFC by People’s Bank of China (PBOC) may have stoked existing fears, although both HDFC and market experts said that those concerns are overplayed.

“They (PBOC) are passive shareholders. Certainly, this (stake increase) is not with the objective of either taking over the company or taking over the management. There are enough safeguards in the system and that nobody can go and change the management,” said HDFC’s Keki Mistry after the news became public.

In his press conference a few days ago, Congress party leader Rahul Gandhi had warned of these fears and asked the government to act.