Neighbouring investments will need prior approvals
The FDI amendment, announced on 18 April 2020, will allow the Government to evaluate Chinese Investment proposals on a case to case basis, thus allowing it to streamline future investment proposals.
The Government has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers and or acquisitions of Indian companies due to the current COVID-19 pandemic and amended the extant FDI policy as contained in Consolidated FDI Policy, 2017.
Already, there is a requirement for Chinese Investments to be scrutinized in sensitive sectors such as Telecom, I&B, Defence etc.
“Thus, the proposal will only expand the scope of such scrutiny by the Government across sectors and activities,” said Nangia Andersen LLP commenting on the changes on 18 Apr 2020.
This is a significant development as all future FDI (whether direct or indirect) from neighbouring countries (including China) would henceforth require a prior approval of the Government, added Dhruva Advisors LLP.
The Press Note currently covers only FDI from these countries and it would be interesting to see whether the policy action would cover other routes of investments available for investors of these countries, for instance the Foreign Portfolio Investment (FPI) route.
Further, no de minimis limit is provided and even minority investments from such countries (including share transfers to investors in such countries) would require a prior approval from the Government, explained Dhruva.
The term “beneficial owner” has not defined in the Press Note. An issue may arise as to whether one has to consider the immediate or the ultimate beneficial ownership of investors proposing to invest in Indian entities.
While there is sufficient jurisprudence on the term “beneficial owner” in the context of international tax laws, the said interpretation may not be relevant, considering the context of the Press Note.
Hence, where the immediate or the ultimate beneficial investor is from a country covered in the Press Note, it may be advisable to act with caution before any investment decisions are taken and in appropriate cases, obtain due clarification from the Indian Government.
Consequential changes in KYC norms (to include details of beneficial ownership) as well as the reporting forms such as FC-GPR, FC-TRS, etc can be expected.
The new rule shall also apply to transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in beneficial ownership falling within the hands of individuals and entities belonging to countries as stated above shall also require Government approval.
The change will come into force from the date of Foreign Exchange Management Act, 1999 (FEMA) Notification to be issued in this regard.
While it is evident that the trigger for inserting this significant protective measure emanates from the recent acquisitions undertaken by Chinese companies both in India and outside India, it is not clear as to how long this rule will continue to be in place once the Lockdown is over & its effects begin to fade.
The Government Press note does not provide any grandfathering provision for future investments in case of existing subsidiaries including wholly-owned subsidiaries that have been set up under the automatic route earlier by entities from these jurisdictions.
According to the Press Note issued by the Department for Promotion of Industry and Internal Trade (DPIIT), an entity belonging to a country which shares a land border with India viz., Bhutan, Bangladesh, China, Afghanistan, Myanmar, Nepal, and Pakistan, going forwards, can invest only under the Government route, regardless of the sector and activity in which the investment is proposed to be done.
In case, where the beneficial owner of investment is situated in or is a citizen of any of these countries, the same provision shall apply, i.e., prior Government approval shall be required. fiinews.com
