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AMENDMENT OF FDI POLICY TO CURB OPPORTUNISTIC ACQUISITIONS DURING

THE COVID-19 CRISIS

Foreign Direct Investments (“FDI”) by non-resident investors in Indian entities are governed by
the extant Foreign Direct Investment Policy, 2017 (“FDI Policy”) issued by the Department for
Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of
India (“DPIIT”)1 where FDI in certain sectors or by certain category of investors are either
prohibited or permitted under (a) the automatic route, where the non-resident investor or the
Indian company does not require any approval from Government of India for the investment
(“Automatic Route”); or (b) government route, where prior approval of the Government of
India is required (“Government Route”)automatic route without permission of Government of
India or require prior permission of the Government of India (“Government Approval”).
Proposals for foreign investment under Government Route, are considered by respective
Administrative Ministry/Department and the Reserve Bank of India.

In light of COVID-19 pandemic, the Department for Promotion of Industry and Internal Trade
has issued Press Note 3 of (2020 Series) (“Press Note”), on April 17, 2020 amending the extant
FDI Policy for curbing opportunistic takeover/acquisition of Indian companies. The
amendment states that an entity of a country, which sharing shares land border with India
(Pakistan, Bangladesh, China, Myanmar, Bhutan, Afghanistan and Nepal) or where the
beneficial owner of an investment into India is situated in or is a citizen of any such country ,
can invest only under Government Approval Route. Prior to the Press Note, such restriction of
making investment under requiring Government approval Route was only applicable to a
citizen or entity from Pakistan or Bangladesh. Further, the Press Note also states that in the
event of any transfer of ownership of any existing or future FDI in an entity in India, directly or
indirectly, resulting in the beneficial ownership falling within the restricted countries as above,
would also require Government approval. The Press Note will be effective from the date of
FEMA notification.

The Press Note has been issued considering the impact on economy by Covid-19 and seeks to
prevent any opportunistic acquisitions of vulnerable Indian entities at a low valuation by
foreign entities. Although the Press Note does not explicitly mention China, the intention of the
Government to regulate and restrict investments from China is evident, China being the fastest
growing source of FDI in India since 2014 (India has received USD 1.81 billion (around Rs
12,474 crore) foreign direct investment from China during April 2014 to March 2019). Such
protectionist measures have also been adopted by other countries in order to keep foreign
investments regulated during this global crisis.

1
notified by the D/o IPP F. No. 5(1)/2017-FC-1 dated August 28, 2017.
 Link Legal
India Law Services

This comes soon after the Securities and Exchange Board of India (“SEBI”) had sought details
from custodians regarding beneficial ownership of foreign portfolio investors (“FPI”) (entities
investing in companies listed on Indian Stock Exchanges) from China and Hong Kong. This has
especially come into focus post the steady acquisition of shares in HDFC by People’s Bank of
China over the past few weeks. However, investments through FPI route will remain unaffected
by this Press Note.

A plain reading of the Press Note provides all types of FDI investments from Chinese investors
subject to Government Approval including brownfield and greenfield, acquisition of existing
Indian companies (even minority acquisition, seed funding, venture capital investment etc.) or
even setting up of wholly owned subsidiary or joint venture in India. Such blanket restriction
may hamper competition and reduce the number of potential investors available for a
prospective seller, and in turn may drive down the valuation of such companies. The Press Note
also impacts the subsequent investments by Chinese investors which are agreed in tranches in
the investment documents already executed. Additionally, such restriction in greenfield
investments where investors bring in fresh capital such as setting up a joint venture or wholly
owned subsidiary will obstruct fresh infusion of funds into the Indian economy and creation of
employments. The concept of beneficial ownership (though not defined) has been introduced in
the Press Note to regulate the ultimate ownership of the investor which implementation of
which is may be extremely difficult.

This significant move will impact the sentiments of Chinese investors and can be balanced by a
clarification by Government of India keeping in mind the long term foreign direct investment
policy of India, restricting the Governmental Approval approval to a specified type of
takeover/acquisition intended to be curbed by the Press Note.

The Press Note can be referred here Press Note No. 3 (2020 Series).

Santosh Pai, Partner and head of China Practice at Link Legal India Law Services, has been quoted in
articles in New York Times article (URL to be attached), The Hindu article (URL to be attached),
Thomson Reuters (https://in.reuters.com/article/health-coronavirus-india-investments/india-toughens-
rules-on-investments-from-neighbours-seen-aimed-at-china-idINKBN2200LD) and The Economic Times
(URL to be attached) expressing his views on the Press Note.