Context

The Government of India has reviewed the extant Foreign Direct Investment(FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017. 

About

Present Position 

• Para 3.1.1:

• • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
  • However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
  • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Revised Position 

• Para 3.1.1:

• 3.1.1(a) A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
  • However, an entity of a country, which shares land border with India 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 the Government route.
  • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.
• 3.1.1(b) In the event of the 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 restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.

Reason behind the decision:

• Indian corporates had expressed concerns about possible takeovers of distressed firms by Chinese companies.
• The fear is partly due to the concerns arising from other countries where Chinese investments in the time of COVID-19 are seen as an attempt to take over national assets at a time of crisis.
• There is an increasing interest among Chinese firms to invest in Indian MSMEs as the changing global supply chain dynamics - which began to gather strength in face of retaliatory tariffs during the US-China trade war - necessitate alternate supply sources to serve global locations.
• Indian MSMEs in engineering sector have been seen as an attractive target for such firms.
• The government amended the rules by including individuals and companies of all countries that share land borders with India, effectively bringing Chinese individuals and companies under the new protocol.
• The decision is likely to impact foreign investments, particularly from China which pumped in $2.34 billion in FDI between April 2000 and December 2019.

Impact of the move:

• From now onwards, government approval will be necessary a company or an individual from a country that shares land border with India can invest in any sector.
  • India shares land borders with six countries – Bangladesh, Myanmar, China, Bhutan, Nepal and Pakistan.
• Until now, government permission was mandatory only for investments coming from Bangladesh and Pakistan.