Recent Amendment in the FDI Policy of India Due to COVID-19

#India

On April 18th, 2020, the Central Government of India amended the Consolidated FDI Policy 2017 (“FDI Policy”), to curb “opportunistic takeovers/acquisitions of Indian companies” due to COVID-19. Under the press note the following two new restrictions have been introduced:

An entity of a country, which shares a 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 R

Government approval will also be required where subsequent changes in beneficial ownership (by way of direct or indirect transfers) of any existing or future FDI would result in such beneficial ownership falling within the purview of the first restriction.

The largest impact of this change in policy will be on the foreign direct investment from China, although this development also impacts investments from Pakistan, Bangladesh, Myanmar, Bhutan, Afghanistan and Nepal.

Recently, the People’s Bank of China raised its stake in India’s key commercial bank Housing Development Finance Corp. Ltd (HDFC) from 0.8% to 1.01% through open market purchases which raised a storm amongst Indian regulators and triggered the introduction of this change.

The applicability of this measure is very wide. It will cover not only direct investment by companies in India but also indirect investments. For instance, if a company invests in an entity overseas that has in turn invested in India, this will also need to be approved by the government. Further additional investment in existing ventures or wholly owned subsidiaries of multinationals will also be impacted.

To mention a few, Alibaba and Tencent, China’s largest listed firms, are shareholders in over a dozen of Indian startups, collectively worth tens of billions of dollars. Some of China’s largest venture capital firms such as Qiming, CDH and Morningside have all made early stage bets in India. This development is expected to have a large impact on the fundraising efforts of start-ups, SMEs and MSMEs in India, in a time where sources of funding are extremely limited.

These amendments have been notified by the Government of India, however, certain finer details such as the applicability of any thresholds or exemptions (in any) are yet to be clarified by the Government of India. China is the world’s second-largest economy. From an economic standpoint, the long term impact of this change and whether it will boost or harm the Indian economy, will need further evaluation.