Chinese investors likely to face Sebi heat after change in FDI rules

Cap on purchase limit being discussed

The Securities and Exchange Board of India (Sebi) is likely to make investment rules more stringent for China and other neighbouring nations.

This follows the recent modification in the Union government’s foreign direct investment (FDI) norms, with China at the centre of the tweak.
 

Besides stepping up scrutiny, Sebi could put a cap on the purchase limit, beyond which additional approvals would be required, said a person privy to the initial discussion. Sebi may also ask custodians not settle any trade without proper identification of end-beneficiaries.
 

Last week, the government removed all neighbouring countries from the automatic FDI route. What was applicable only to Pakistan and Bangladesh — the two countries that were barred from automatic FDI — has now been extended to all neighbouring countries.

Chinese investment, forming a large chunk in the Indian start-up world, is believed to have triggered the change in the FDI rulebook. The move is seen as a wedge to prevent Chinese investment firms from acquiring domestic companies at bargain valuations caused by the Covid-19 outbreak.
 

Earlier, Sebi had sought extensive details from custodians with respect to investments from nations with whom India shares its borders. Beneficial ownership, control and board composition of funds and total investment corpus are some of the details asked by Sebi.

The increase in vigilance comes after Chinese firms picked up stake in several domestic companies during the selloff in March.

“The regulator is in touch with custodians that empanel foreign portfolio investors (FPIs). It wants to ensure verification of all accounts, not just those with new purchases but also the existing ones,” said a person cited above.
 

Sebi wants investments routed through Hong Kong and other financial hubs to be vetted as well. With Chinese companies now required to take government approval for any FDI, no China-domiciled FPI can buy beyond 10 per cent in a listed company without prior permission from the Indian authorities.

Experts say there are adequate provisions to monitor portfolio investments. The regulator and the government may soon clarify their stance on the issue as the FDI circular has resulted in some ambiguity.

“There are checks and balances embedded in the current FPI regulation to avoid risk of a hostile takeover. Single or even a group of foreign investors with related entities can take ownership only up to 10 per cent. Hence, the cause of worry in portfolio investment is comparatively lower than the automatic route of foreign direct investment,” said Bhavin Shah, partner, PwC India.
 

It would be interesting to see the factors considered by the regulator while processing such applications, said Devraj Singh, Associate Tax Partner, EY India.

“The Centre should also ensure proposals are considered in a time-bound manner as firms are in dire need of funds in such challenging times. It should also be ensured that any bona-fide investments that are aligned with our national interest, should not be adversely affected,” Singh said.
 

India is scrutinising China and other neighbouring nations as high-risk jurisdiction. Higher scrutiny includes bi-annual scrutiny of accounts and ultimate beneficial owner (UBO) reporting once every three months.

While accounts of investors from low-risk countries are scrutinised every three to five years, UBO reporting happens annually. So far, the US, UK, Singapore and Hong Kong are in the low-risk bracket.

China calls India’s move to scrutinise FDI discriminatory
 

The Chinese government slammed India's latest changes to the foreign direct investment (FDI) policy that mandates government approval for all investments by neighbouring countries, including China.Two days ago, New Delhi effectively closed the ‘automatic route’ of investment for Chinese firms and individuals. An increasing amount of funds had recently started to flow into the start-up, e-commerce and digital sectors in recent years through this route. But on Monday, China retorted that this will make investments difficult.  “Chinese investment has driven the development of India’s industries,” said spokesperson of the Chinese Embassy.