FDI rule aimed at China becomes law after FEMA notification

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The government has issued a notification via the Foreign Exchange Management Act (FEMA) that foreign direct investments from India’s neighbouring countries will be subject to approval, giving it the force of law after notifying in a press note a few days ago.

The FEMA notification was broadly among expected lines and did not vary significantly from the press note.

This is a step the government has taken since the start of this week after Housing Development Finance Corp. Ltd (HDFC) said that the Chinese central bank, the People’s Bank of China (PBOC), had raised its stake in the home lender from 0.8 percent to 1.01 percent in the March quarter through open market purchases.

Although China is not named in the amendment, it is the main reason for this update.

More importantly, the notification is not restricted to prior approval for direct investments by Chinese firms and also restricts any transfer of investments/future FDI resulting in beneficial ownership falling with Chinese firms.

Entrepreneurs, investors and policy experts were also hoping that the FEMA note would take a few more days, giving startups more time to close any ongoing funding rounds from Chinese investors and plan their capital structure, people told Moneycontrol.

While this move was triggered by PBOC’s investment in HDFC, it will also impact Indian startups, for whom China has been a stable source of capital. Alibaba and Tencent, China’s largest listed firms, are shareholders in over a dozen Indian startups, collectively worth tens of billions of dollars in companies such as One97 Technologies (Paytm), OYO, Dream11, Snapdeal and BigBasket.

Besides strategic investors such as Alibaba, Tencent and ByteDance, Chinese venture capital firms have also been ramping up their presence in India. Some of China’s largest VCs such as Qiming, CDH and Morningside have all made early stage bets in India.

However, three lawyers Moneycontrol spoke to said that the fine print needed to be read before understanding its full impact.

For instance, Foreign Venture Capital Funds registered with SEBI and investing under Schedule VII seem to be exempted from this amendment, said one of the lawyers cited above, requesting anonymity.

[We will update this copy as clarity emerges on the subject.]