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Extant Foreign Direct Investment (FDI) policy

  • Category
    Economy
  • Published
    29th Apr, 2020

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.

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.
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