Govt nod must for all FDI from neighbouring nations, including China: DPIIT

Aim is to curb 'opportunistic takeover' of Indian companies due to the current Covid-19 pandemic, new rules also apply to transfer of ownership of FDI

In a major change in its foreign direct investment (FDI) policy, India has brought in stricter measures to curb the 'opportunistic takeover' of Indian companies due to the current Covid-19 pandemic by firms in neighbouring countries, including China.

According to the Press Note 3 issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on Saturday, the government has said that an entity of a country which shares a land border with India can invest only after receiving government approval.

"However, 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 route," says the note. The new rules will also apply to 'the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly,' the DPIIT has said.

“This step seems to be aimed at having a hostile takeover control measure against China, given that it is investing in and acquiring companies all over the world. The government, according to press note 3, would like to evaluate Chinese investment on a case-to-case basis,” said Atul Pandey, partner at law firm Khaitan & Co.

Chinese investment was allowed under the automatic route, but for in sensitive areas like telecom, defence and national security etc., he added.

The Chinese have stakes in several Indian start-ups: Flipkart has an investment from Tencent (about 5 per cent) and Alibaba owns a significant stake in Paytm. 

A fresh infusion of funds in these or Chinese firms wanting to exit their existing investments will now have require government’s approval, said Pandey.

The pitch for curbing Chinese investments in India picked up pace recently after People’s Bank of China (PBoC) increased its shareholding in Housing Development Finance Corporation (HDFC) amid a sharp correction in shares of India’s largest mortgage lender.

On the other hand, the already tight rules for citizens of Pakistan remain the same, and sectors such as defence, space, atomic energy and sectors continue to remain prohibited to them.

"The massive economic slowdown has weakened many Indian corporates making them attractive targets for takeovers. The Govt must not allow foreign interests to take control of any Indian corporate at this time of national crisis," former Congress President Rahul Gandhi had said last week.

Historical investments from China remain a low $ 2.3 billion as of December, 2019 despite the government's push to seek more capital from the cash-rich neighbour.