Major change in FDI policy of India, w.e.f. 17th April 2020

Government has come with a decision to block the automatic route for approving FDI from China and other countries sharing land border with India. This has stunned many, including investors from across geographies.

China’s central bank recently bought 1.01% stake in HDFC. According to shareholding disclosures for March quarter, 1.75 crores shares of India’s biggest housing lender were bought by People’s Bank of China.

The government had identified that China-backed funds were seeking to buy Indian financial assets after the outbreak of Covid-19.

Therefore, Government didn’t take much time and after much deliberation came with an amendment in the FDI policy (Clause 3.1.1(a)) saying:

That 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.

This means that China, Pakistan, Sri Lanka, Bangladesh, Myanmar, Nepal are all covered under the above amendment.

Government route means essentially the investment can materialize only after obtaining consent from the GOI. The move is said to protect the opportunistic takeovers/ mergers/ acquisitions of Indian Companies by Chinese entities.

Currently, there are close to 16 Chinese foreign portfolio investors registered in India and have bought stocks worth more than US$ 1.4 billion in top tier Companies.

Chinese investments have increased considerably into 54 Companies in the year 2017 as compared to only 3 in the year 2013.

In about 66% of India’s startups that are Unicorns, have at least one Chinese venture capitalist investor.

This includes companies like Paytm, Big Basket, Icertis, Zomato, Delhivery, Byju’s, Hike and so on.

The overall FDI trend in the year 2018-19 was:

This apprises us that still the country with major FDI into India is Singapore, followed by Mauritius and Netherlands.

Further, sector wise split of the FDI in the year 2018-19 into India is as follows:

*Service sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing & analysis

** Total includes the total FDI from all countries

Source: Fact sheet by DIPP on FDI

This tells that major investment in form of FDI has taken place in the most service oriented scalable growing organizations, with focus on Fintech, AI, AR, VR, SaaS, IoT, Computer software & hardware offerings.

The major observation here is that China in terms of the total FDI investment into India was not the leading countries. However, over the course of last 6-9 months it had made an aggressive progress and invested in major Unicorns having evolved over the last year or so.

The above signifies a noteworthy interest from US giants into world’s 5th largest economy.

Government stepped in at the right time and had to revise the policy to circumvent opportunistic benefits during COVID times, to countries like China.

A couple of queries which will take time to get addressed include:

1. Who will the beneficial owner be, as mentioned in clause 3.1.1 above?
2. Will there be any conditional relaxation on the above amendment?

Particularly at a time when manufacturing companies are exiting its shores and Chinese capital is increasingly becoming unwelcome, Beijing needs to adopt a more conciliatory approach — one which sensibly addresses the grievances and fears of other states. Otherwise, it may risk becoming an outcase in the international society.

This brings about a question that does this change really resolve the so-called problem of neighbourly investors mopping up stake in listed companies. Time will tell.

We’d soon be coming out with our post on Impact of FDI policy on Chinese investments and possible future from here.

Written by: Ayush Dadhich & Manas Vashistha

You can also read our blog on medium through the following https://medium.com/@ayush_63583/impact-of-change-in-fdi-policy-april-2020-on-startups-612ec40a000c

Signing off!

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