The global economic slowdown coupled with tumbling stock markets and ever increasing non-performing assets may be seen as an investment opportunity by some. People’s Bank of China increasing its shareholding in HDFC Bank (one of India’s largest private sector banks) to 1.01% in March 2020 may be seen as a good example of these kind of investment opportunities. This investment by the People’s Bank of China along with screening steps taken by regulators in other jurisdictions (for instance, the guidelines issued by the European Commission to protect important European assets on account of the on-going economic crisis) may have inspired the Department for Promotion of Industry and Internal Trade to issue the Press Note 3 of 2020 (“PN 3”) on April 17, 2020 announcing the Government of India’s decision to amend the foreign direct investment (“FDI”) policy.

As a result of the new amendment, FDI by any entity based in any country sharing land border with India, or where the beneficial owner of an investment is situated in or is a citizen of any such country, will now require the prior approval of the Government of India. The objective of PN 3 is seen by many as intending to impose additional screening on direct or indirect FDI from China and curb opportunistic takeover / acquisitions of Indian companies due to the current Covid-19 pandemic. This would also have a direct implication on investments from Hong Kong as it is a part of China, though having a separate administration

The restrictions enumerated in PN 3 have been summarized below:

  • Any non-resident entity based in a country which shares a land border with India or where the beneficial owner of an investment in India are situated in or is a citizen of any such country (“FDI Restricted Country”), then such entity can invest in India only with prior approval of the Government of India; and
  • Transfer of ownership in any existing Indian entity or future FDI in an Indian entity, directly or indirectly, resulting in the beneficial ownership falling in entities / citizens of a FDI Restricted Country shall also require prior approval of the Government of India.

Some of the critical and notable actions which will now require prior approval of the Government include any fresh FDI from a FDI Restricted Country, any capital infusion in Indian subsidiaries of a company incorporated in a FDI Restricted Country, bonus / rights issue to a shareholder in a FDI Restricted Country, exercise of rights under existing shareholding agreements (such as call or put options) involving an entity in a FDI Restricted Country, any intra-group arrangement where the shares of an Indian company is being transferred to another group company which is incorporated in a FDI Restricted Country.

Notably, the restrictions set out in PN 3 would apply even if the beneficial owner (and not the immediate shareholder to which shares are being issued or transferred) is from a FDI Restricted Country. It is also interesting to note that there is no corresponding policy change for foreign portfolio investments.

One would also have to evaluate the implications of India’s obligations towards China under the Agreement for the Promotion and Protection of Investments (“Agreement”) which provided China the ‘Most Favoured Nation Treatment’ protection. Though this arrangement was terminated by India with effect from October 03, 2018, the Agreement continues be effective for a period of 15 years from the date of its termination. India is, therefore, contractually bound to adhere to the Agreement in respect of all investments made prior to October 03, 2018.

The move is likely to have substantial implications on future investments by venture capital and private equity funds based out of China, which have been actively investing in the Indian start-up ecosystem over the last few years. Notable investments from Chinese conglomerates such as Tencent (which counts itself as an investor in Swiggy, Dream11 and Byju’s) and Alibaba (investor in Paytm and BigBasket), have helped these start-ups to become a part of the coveted unicorn club. While these amendments are at present policy announcements and will have the force of law only after relevant amendments are introduced in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, the proposed amendment warrants all Indian business to evaluate the need for Government approval for any ongoing transaction or any future investment commitments and wherever such an approval is required, the impact on the timelines of completion of such transaction.

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