Proposed amendments to India’s foreign investment laws: analysis and impact on Chinese investments in India

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Rabindra Jhunjhunwala
Khaitan & Co, Mumbai
rabindra.jhunjhunwala@khaitanco.com

Parag Bhide
Khaitan & Co, Mumbai
parag.bhide@khaitanco.com

India with effect from 22 April 2020 implemented a new policy for foreign direct investment (FDI) from neighbouring countries (including China). The FDI (direct as well as indirect) from China will now require prior approval of the Indian Government. This article aims to analyse key amendments to Indian exchange control law regime and impact of such amendments on Chinese investments and M&As in India.

Introduction

On 17 April 2020, India announced a new policy for foreign direct investment  from China when the department for Promotion of Industry and Internal Trade issued Press Note 3 of 2020 ('Proposed Amendments'). Under the policy, all investments from China or any entity of a country, which shares a land border with India, will now require prior approval of the Government of India. Moreover, the approval requirement will not only apply to direct investments but also to indirect investment transactions where the investment’s beneficial owner is from China. The Proposed Amendments will be effective only once they are notified under India’s Foreign Exchange Management Act 1999 ('FEMA Notification').

This article aims to analyse the Proposed Amendments to and the impact of such amendments on Chinese investments and M&As in India.

Analysis of the amendments and impact on global transactions

In recent years, Chinese investments in new start-ups as well as manufacturing companies have been on a constant rise. According to data published by the Department for Promotion of Industry and Internal Trade, China alone is among the top 20 FDI contributors in India.[1]

Chinese investments do not currently require any prior government approval for investment in Indian companies, except in cases of companies operating in sensitive sectors requiring prior approval of the Government of India (eg, telecoms, defence, etc).

Once the Proposed Amendments are notified, all direct as well as indirect Chinese investments in Indian companies will require prior government approval. Moreover, all global transactions by Chinese investors with the target company having a subsidiary in India may also need prior approval. This is because the beneficial ownership of the Indian entity will be deemed to have been transferred to the Chinese investor pursuant to the acquisition/investment transaction. On a positive side however, the Amendments only apply to foreign direct investments and not to foreign portfolio investments. 

At present, the time period for processing FDI applications for government approval ranges from eight to ten weeks.[2] Once the Proposed Amendments are notified, the volume of FDI applications from Chinese investors seeking approval is expected to increase which will massively affect overall timescales for obtaining FDI approvals. Moreover, investors will have to deal with the uncertainty of the approval outcome.

The government has clarified that the Proposed Amendments are the result of the Government of India’s review of the FDI policy for curbing opportunistic takeovers or acquisitions of Indian companies due to the Covid-19 pandemic.

It is, however, worthwhile to note that the Amendments are prospective in nature. 

Conclusion

As mentioned, the Proposed Amendments are the outcome of the Government of India’s review of the FDI policy for curbing opportunistic takeovers or acquisitions of Indian companies due to Covid-19. Therefore, the Proposed Amendments aim is to monitor closely FDI flows into the country; and permit bona fide investors investing in India as long-term partners.

The specific nuances of the Proposed Amendments are not yet certain. For example, whether the Proposed Amendments will apply to investments from Hong Kong, which is a special administrative region? Whether, any summary/fast track approval process will be prescribed for non-sensitive or capital-intensive sectors is also not clear. It also remains to be seen if the Proposed Amendments will apply to global funds and collective investment vehicles with Chinese LPs/beneficiaries. We expect the government to bring in required clarity on these aspects as and when they issue the FEMA Notification.