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FDI policy: Indian government walking a tightrope

As the objective is to curb the opportunistic takeovers, it may be appropriate to introduce a threshold for investment beyond which the restrictions may apply.

April 28, 2020 / 03:25 PM IST
 
 
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By Rudra Kumar Pandey and Anirudh Srinivas

The Indian government’s recent decision to amend the Foreign Direct Investment Policy and Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, related to investment from India's neighbouring countries under the government approval route has been well documented.

This amendment will not just affect foreign investments in India from our neighbouring countries, but may also impact foreign investments from other countries. While such a protectionist measure by the Indian Government has reportedly been in the works for a while, the amendment came on the back of the People's Bank of China raising its stake in HDFC.

This move is not unprecedented. India has joined a growing list of countries enforcing measures to protect domestic industries. The European Union, followed by various member states including Germany, France, Italy and Spain, announced measures to protect their companies from foreign takeovers. Elsewhere, such measures have also been introduced by other countries such as Canada, the United Kingdom and Australia.

Similarly, late in 2019, Japan had amended its foreign investment law to provide for rigorous screening of foreign investment of more than 1% in specific critical sectors. Japan now proposes to include the drugs and medical equipment industry within the list of critical sectors. In the USA, the Committee of Foreign Investment in the US adopts a sector-specific approach to screening foreign investment. However, the other countries have not linked such restrictions to the sharing of land borders.

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While the actions of the Indian government are understandable in these trying times, several concerns relating to the implications of the amendment to the Rules have been raised by various stakeholders. For instance, how is the investment by an entity from a neighbouring country controlled by persons outside the neighbouring countries to be treated? Further, the permissibility of foreign investment by a fund set up outside the restricted countries with an asset manager or a general partner controlled by a person incorporated in a neighbouring country also requires clarity.

In the absence of any specific guidance on ‘beneficial owner’, it would be interesting to know the threshold that may be proposed by the government for this determination. It is to be seen whether the threshold for ‘beneficial owner’ would be pegged at the 10 percent threshold provided under the Companies Act, 2013; or the controlling threshold provided under the Prevention of Money Laundering Act, 2002, or 15 percent or 25 percent threshold under the RBI KYC guidelines.

As the objective is to curb the opportunistic takeovers, it may be appropriate to introduce a threshold for investment beyond which the restrictions may apply. Further, investments in startups, greenfield projects and additional investment in existing subsidiaries in sectors other than those which are strategically important, should be exempted from the applicability of these restrictions. Japan also has screening restrictions for foreign investment beyond 1 percent in identified sectors. India may consider putting in place a similar mechanism.

An exception should also be made for the special administrative regions of China, such as Hong Kong and Macau, which have their financial independence and different currencies. Downstream investment by a foreign-owned or controlled Indian company which has minority investment from an entity in a neighbouring country should be exempted from within the scope of the restrictions introduced by the amendment. Downstream investment from internal accruals by an Indian company which is owned or controlled by an entity incorporated in a neighbouring country should also be exempted.

It is also unclear if approval process for investment from other neighbouring countries, including China, would be bundled with approval process for investment from Pakistan and Bangladesh, which entail obtaining a security clearance from the Ministry of Home Affairs.  Government needs to be mindful that such approval process should not become a bottleneck for foreign investment in to India and should introduce a transparent and fast track process to facilitate all such investments.

Various stakeholders, including industry representative bodies, have sought clarifications from the Government, regarding various aspects of the amendment to the Rules. The Government is expected to issue necessary clarifications in the coming weeks and provide clarity on the restrictions introduced in the Rules. The ball is now in the Government’s court to protect Indian industry from opportunistic takeovers by India’s neighbours while ensuring that foreign investment into India is not stifled.

Rudra Kumar Pandey is Partner, Shardul Amarchand Mangaldas & Co while Anirudh Srinivas is Sr. Associate, Shardul Amarchand Mangaldas & Co.

(Views are personal)
Moneycontrol News
first published: Apr 28, 2020 03:19 pm

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