Govt put out update FDI policy, ambiguity on Chinese firms continues

India’s Commerce Ministry on Wednesday made public a new edition of foreign direct investment (FDI) policy, listing measures the government has taken to seek investors but it didn’t clarify on the issue of "beneficial ownership".

The new edition includes the April 2020 circular that said foreign investment from countries sharing a land border with India requires prior approval of the Indian government. That included investment from any entity "beneficially owned" by entities in countries sharing a land border with India. 

This has given rise to ambiguity since foreign investors and funds which although not owned/controlled by Chinese entities but have minority stakes / limited partners from China are being treated to be covered within the said curbs, said Atul Pandey, partner, Khiatan & Co. 

The FDI Policy has consolidated all the existing press notes introduced subsequent to the previous FDI Policy of 2017 into the present FDI Policy, as well as introduced the changes made under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. 

According to the Department for Promotion of Industry and Internal Trade (DPIIT), the new circular has come into effect from October 15. 

Pertinently, E-commerce companies will note that the changes introduced in the present FDI Policy carries forward the changes in Press Note 2 of 2018, including the requirements of ensuring that the e-commerce companies do not have any equity / control over inventory of the sellers in any manner. 

In respect of start-ups, the FDI Policy also incorporates the already introduced clarification that for sectors under automatic route, issue of equity shares against import of capital goods/ machinery/ equipment (excluding second-hand machinery) and pre- operative/pre-incorporation expenses (including payments of rent etc.) is permitted under automatic route subject.

The exercise is aimed at providing an investor-friendly climate to foreign players and, in turn, attract more FDI to boost economic growth and create jobs.

The government has liberalised FDI policy in several sectors, including coal mining, digital news, contract manufacturing and single brand reta