Central Government amends FDI policy of India

It is to bar opportunistic investment by neighbor nations including China

• The Government of India has recently amended the Foreign Direct Investment (FDI) policy
• It is to curb opportunistic takeovers or acquisitions of Indian companies due to the current COVID-19 pandemic
• The amendment proposes bar on automatic route of FDI by the neighbor nations and now require a nod from the government

Salient features of the amendment

• As per the new amendment, FDI investments into Indian companies from the neighboring countries will now require a nod from the government
• This will be applicable to all countries that share a land border with India – such as China among others
• The amendment specifies that transfer of ownership of Indian companies arising out of FDI investments from neighboring countries will now also be subject to government approval
• Government has reviewed the FDI policy for curbing opportunistic takeovers or acquisitions of Indian companies due to the current COVID-19 pandemic

Key provisions of the amendment

• A non-resident entity can invest in India, subject to the FDI Policy except in those sectors or 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 or activities other than defense, space, atomic energy and sectors or activities prohibited for foreign investment
• 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 or purview of the mentioned sector
• Such subsequent change in beneficial ownership will also require Government approval
• The decision will take effect from the date of Foreign Exchange Management Act (FEMA) notification
• Moreover, in case of the transfer of ownership in an FDI deal, the acquisitions can be made only via government route

Background for the amendment

• Securities and Exchange Board of India (SEBI) was monitoring equity transactions in India by Chinese companies and banks
• Such transactions have come under the scanner at a time when the share prices of companies have dropped due to the economic impact of the corona virus pandemic
• Globally, transactions by Chinese firms and institutions have come under scrutiny recently since the assets are being purchased at low valuations
• Nations such as the US, Japan and Australia have already placed restrictions on Chinese companies buying assets
• The changes have been made largely to check the growing influence of Chinese firms in Indian infrastructure companies and banks
• Recently, news surfaced that People’s Bank of China increased its stake in Housing Development Finance Corporation to 1.01 per cent from 0.8 per cent

Pic courtesy : newsabplive.com