India joins and overtakes EU & Germany in implementing strict review of Chinese investments in covid-19


published on 30 April 2020 | reading time approx. 6 minutes


The current covid-19 Pandemic has claimed many lives globally and also greatly impacted the global economy in today’s time. Such economic impacts can very well be evidenced in the sudden fall in the stock market for India, which makes vulnerable companies a hot bed for foreign investments buying distressed assets at a cheaper price.




The acute economic crisis caused by the pandemic makes it essential for the Indian Government to monitor the foreign Investments pouring in the Indian Companies in addition to making stricter regulations for Foreign Direct Investment (FDI). 

Keeping in mind the current economic impact of covid-19 pandemic, the Government of India has recently issued a Press Note in order to review the extant FDI Policy for safeguarding Indian Companies from such hostile foreign investments to buy distressed assets at cheap prices. Vide Press Note No. 03 (2020 Series) issued on 17th April, 2020, amendments are issued in the extant FDI Policy for curbing these opportunistic takeovers/ acquisitions of Indian Companies under to the current covid-19 pandemic.

The Press Note was issued after China’s Central Bank, i.e., the People’s Bank of China (PBOC) has bought 17,492,909 (approximately seventeen and half million) shares, to increase its  shareholding to 1.01 percent in the HDFC Bank Ltd., largest private sector bank in India. The shareholding was noted in the HDFC’s shareholding disclosure at the end of the March Quarter. Considering the fall of HDFC’s shares by nearly 40% in this year 2020 due to the current covid-19 Pandemic, such share purchase indicates an opportunistic approach towards the vulnerable times posed by the current covid-19 Pandemic.

Pre covid-19 FDI regulatory framework in India

FDI can be routed in India in two ways, i.e., Automatic Route and Government Route, subject to the sector the FDI falls in. FDI in sectors prescribed under Automatic Route, does not require a prior approval from Government of India or Reserve Bank of India (RBI). However, FDI made in sectors prescribed under Government Route, require a prior permission from the relevant government authority in order to make such an investment. Such FDI shall be in accordance with the conditions stipulated by the Government in its approval. Except for the prescribed prohibited sectors/ activities, the extant FDI Policy stipulates for the permissibility, extent and entry route for various sectors of industry in India. 

Prior to this Press Note No. 03, 2020, non-resident entity could invest in India, subject to the FDI Policy except in those sectors/ activities which were prohibited. FDI was allowed in India under automatic route in most of the sectors. However, citizen of Bangladesh or an entity incorporated in Bangladesh could invest in India only through Government Route and a citizen of Pakistan or an entity incorporated in Pakistan could invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and prohibited sectors/activities prescribed by the extant FDI Policy. 

Recent amendment to FDI Regulatory Framework due to covid-19

The Department for Promotion of Industry and Internal Trade (DPIIT) has reviewed the extant FDI Policy in terms of the Entry Route prescribed for FDI from Countries that share land border with India. As per the Press Note, a citizen of or an entity incorporated in any country which shares land borders with India (i.e. China, Nepal, Bhutan, Bangladesh, Myanmar, Pakistan and Afghanistan or the “Neighboring Countries”), or where the beneficial owner of an investment into India is situated in China or any other Neighboring Countries, may invest in India only under the Government Route, i.e. with a prior approval from the Government of India. 

Further, any transfer of ownership of any existing or future FDI in an entity in India, which may directly or indirectly, result in beneficial ownership to be situated in China or any other Neighboring Countries, such subsequent change in beneficial ownership also requires a prior Government Approval. Unlike amendments brought in by Germany or Italy, which restricts specific sectors to limited and sensitive sectors the Indian government has brought under review all sectors in which FDI is made by an entity incorporated in Neighboring Countries.

These amendment have come into effect from 22nd  April, 2020 after the Department of Economic Affairs, Ministry of Finance issued notification S.O. 1278 (E) to further amend Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. 

The amendment has been criticized by China as a violation to WTO’s principles by being discriminatory in nature and against free and fair trade. These recent amendments to FDI regulations does not ban any entry of direct or indirect investment from China or other Neighboring Countries; it has has only mandated a prior Government approval, restricting the Automatic Route for direct or indirect investment from these Neighboring Countries so that stricter examination of investments be done. Considering the above-mentioned factor, this amendment may not seem to be violating WTO’s principles, if anything, it may be considered as a safeguarding measure from hostile takeovers of companies vulnerable due to the economic impacts of the current unprecedented covid-19 pandemic situation.  

This amendment of the FDI Policy in India is also based on the global sentiments and concerns raised on possible acquisition and takeover attempted by Chinese companies. Similar action are taken by European nations like Germany, Spain, Italy and also other countries like Australia. The European Union was among the first to tighten foreign investment rules in the recent weeks. The European Commission issued the guidelines on March 25, 2020 to ensure a strong EU-wide approach is adopted to screen foreign investment in a time of public health crisis and related economic vulnerability. Many of its member states announcing curbs of foreign investments also followed it.

Recently the Federal Government of Germany passed a bill in its cabinet amending the Foreign Trade Law. The Germany Federal Government in its press release said that it wants to prevent outflows of information or technology that can have serious consequences for public order and security in Germany and those they will achieve this by amending the Foreign Trade and Payments Act. The press release further stated that the Foreign Trade Law in Germany was so far based on the "actual and serious risk" test standard and that the test criterion of an "expected impairment" of public order or security will be applied to foreign investments in future in accordance with the EU Screening Regulation. Thereby making the examination of foreign direct investments more effective by tightening the test standard and closing the crucial loopholes.

Determination of Beneficial Ownership 

The Press Note does define the scope of “Beneficial Ownership” and the manner in which “Beneficial Ownership” be determined. Due to lack of clear definition, this amendment in FDI regulation has a very wide and extended applicability. It may be construed that the restriction is being imposed to ensure that the intent of the amendment is not bypassed through multi-layered structures of investments pouring in entities in India. Inclusion of indirect investments is considered a significant one, considering that multiple investments sourced from China, are made in India through funds in Singapore and Mauritius, and the Government of India should be in a position to monitor all such indirect and multi-layer structured investments made in India. Therefore, any multinational company with investment in India shall pay attention to this amendment in case there is any lateral effects for their Chinese investments.

The method of ascertaining the Beneficial Ownership as provided under the Companies (Significant Beneficial Owners) Rules introduced by the Ministry of Corporate Affairs may not be applicable in the present case nor the definitions applied by the banks under the Know Your Customer (KYC) Direction of RBI could be used for the purpose of determining the Beneficial Ownership under FDI regulations. To determine the Beneficial Ownership under these FDI regulations, a view may be taken that the indirect beneficial interest is determined in case the same is applied while consolidation of financial statements of the said entity as per International Accounting Standard and International Financial Reporting Standard. However, the lack of clarity regarding the scope of “Beneficial Ownership” may be posed as a challenge in implementing the amendment. 

Procedural Challenge of FDI through Government Route 

As per the amendment, all the direct or indirect investments made by entities from China and other Neighbouring Countries require a prior Government approval, by making an application to the relevant Department/Ministry of the Government responsible for that particular Sector. Further, in case FDI is made in sensitive sectors like defence, telecom, private security, information and broadcasting etc., investments from China and other Neighbouring Countries are subject to security clearance from the Ministry of Home Affairs. With this mandate all future investments by these specified entities being routed through the Government of India route, the number of applications may increase exponentially, leading to burden the relevant Department/ Ministry of the Government. 

The Press Note covers only the direct or indirect investments made by entities from Neighbouring Countries in its ambit. Further clarifications are required in cases where Foreign Direct Investment are made from Hong Kong and Macau, which are the Special Administrative Regions (SARs) of China. Weather investment made by entities incorporated in the SARs of China are also mandated to enter through the Government Route, is still unanswered. 

Key takeaways 

With this recent amendment in the FDI Policy, we would like to place emphasis on the following foreseeable effects of these amendment in FDI regulations in India:  

  1. The additional investments in existing joint ventures or wholly owned subsidiaries of multinationals through China or an entity incorporated in the Neighbouring Countries, for which FDI has been previously approved and brought in, will now require a prior government approval irrespective of the sector of the investment.

    Therefore not only the Chinese companies but the Multinational and European Group entities who have made their Foreign Direct Investments in India via their group companies in China will also be affected by this amendment. Such companies should anticipate considerable period of time required in seeking a prior government approval while planning the funding requirements of their subsidiaries in India and while making the investment decisions. In the current economic situation where most of the businesses will be under severe cash flows pressure and therefore such entities shall explore other funding options for the urgent cash requirements and plan their funding arrangements.
  2. Special consideration shall be given to additional procedures for obtaining the Government approval and extended timelines by entities those who are planning to undertake group restructuring involving Indian subsidiaries. A setback may be experienced in case of change in Beneficial Ownership of an investment into India due to foreign transactions made at the group level involving the entity based in China or any other Neighbouring Countries at any level. Any such a change in the Beneficial Ownership of involving specified entities in China or any other Neighbouring Countries will require prior approval of Government of India. The amendment will also be applicable to multi-layered transactions where there is Chinese investment or any investment form any other Neighbouring Countries at any level.
  3. The amendment does not have a retrospective approach, i.e. the amendment does not affect the existing investments in Indian entities made by the entities situated in China or any other  Neighbouring Countries. However, the amendment in FDI Policy may affect the execution of contractual rights such as Call Option or Put Option, commonly used for termination of Joint Venture/ Collaboration Agreements (in this case, between an Indian Entity or citizen and a citizen or entity based in the China or any other Neighbouring Countries).

    In the current situation, companies should explore options whether deferring the call or put options are possible or the Force Majeure clause can be invoked in case it is provided under the Joint Venture Agreements.
  4. Even though the intention of the India government is to only review of Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current covid-19 pandemic, it is not clearly indicated in the press note that the recent amendments to the FDI policy would be only temporary in nature.
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