#fdipolicy

Revision of FDI Policy

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

[1]https://dipp.gov.in/sites/default/files/pn3_2020.pdf

[2]https://www.moneycontrol.com/news/business/startup/fdi-policy-change-while-taming-the-dragon-india-might-be-harming-its-baby-elephants-5163181.html

[3]https://www.livemint.com/

[4]https://www.ndtv.com/india-news/new-fdi-rules-not-a-violation-of-wto-principles-its-only-an-approval-process-government-sources-on-c-2215349