With
an aim to restrict opportunistic takeovers or acquisitions of Indian companies
owing to the ongoing COVID-19 pandemic, Indian Government revised the Foreign
Direct investment(FDI) policy on 18th April, 2020. Countries sharing
land borders with India or where the beneficial owner of an investment into
India is settled or citizen of any such country, will be able to invest under
the Government route. Simply put, this policy requires Government approval by
investors from the neighboring countries to invest in Indian companies. Even
when there is a further change in the beneficial ownership in the case where
any existing or future FDI’s (in an entity in India) ownership is transferred,
whether directly or indirectly, coming under the above mentioned restriction or
purview will need government’s approval.Earlier, the government route was only meant
for Bangladesh and Pakistan in such matters. Moreover, Pakistan was and is
still allowed to invest only under the Government Route and that too in sectors
or activities apart from space, defence, atomic energy and sectors/activities
forbidden for foreign investment.The amendments in the FDI policy will be
enforced from the date of the FEMA notification. In addition, it needs to be
noted that these amendments are not only with respect to fresh FDIs but also
for existing FDIs.[1]
Reason Behind the
Expeditious Revision
The
Indian Government’s move of amending the FDI policy is being viewed as an
approach to control the investments coming from China and to prevent the threat
of the Chinese takeover of Indian companies due to the adverse impact of
COVID-19 on the valuation of the Indian companies. One of the few reasons
behind this could be the increase of its stake in the home lender by the
Chinese Central Bank, the People’s Bank of China (PBOC) from 0.8% to 1.01% in
the March quarter by way of open market purchases. Some of the other countries
such as Spain, Australia, Germany, Italy etc. have set up similar restrictions.[2]
However,
this step taken by the Indian Government is also being questioned considering
the negative impact on Indian Startups as China has been a consistent source of
capital.[3]Furthermore,
the withdrawal of the automatic route for neighboring countries could increase
the approval time for the transactions.
China’s Response to the
Revision
China
has accused India of breaching the World Trade Organization (WTO) principles of
organization and that this revision is contrary to free and free trade.
Moreover, China has put forward a demand to revise the amendments made in the
FDI policy on 18th April, 2020.[4]
India’s Response to the
Accusation Made by China
The
accusation made by China has been refused by stating that the amendments in the
FDI policy are “not denial” of permission. The top government sources also said
that it just involves an approval process and hence there is no kind of
violation.[5]
Originally posted on www.kpalegal.com on 3rd May 2020
Post a Comment