The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India’s Consolidated FDI Policy, 2017 (“FDI Policy”) regulates foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth.

The Government of India has now revised and brought in stricter measures under the FDI Policy in order to curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic by entities from neighboring countries. Accordingly, Press Note 3 issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”) has amended para 3.1.1 of the FDI Policy

The revised FDI Policy reads as follows:

  1. “Para 3.1.1:

    3.1.1(a) 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.

    3.1.1(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.”
Further, the amendment inserts para 3.1.1(b) in the FDI Policy in order to apply the new rules to the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, which would result in the beneficial ownership falling within the above restriction/purview.

Although not specifically stated, the introduction of the words in the press note “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” appears to be a protectionist measure against take overs by Chinese citizens and Chinese corporations given China’s economic clout and cash piles. Prior to this amendment except for China FDI from all other neighbours was in any case heavily regulated. Hence the new restrictions will affect China more than any of India’s other neighbours.

The COVID -19 pandemic and the massive economic slowdown around the world is also expected to have a severe impact in India. Many corporates are expected to have weakened making them vulnerable and susceptible to hostile takeovers by foreign entities, especially China. The Government of India has implemented the new measures with an aim to prevent unfettered takeovers/buyouts of distressed Indian companies mainly by cash rich Chinese. The recent acquisition of a 1% stake in HDFC (Housing Development Finance Corporation) Bank Ltd by the People’s Bank of China (PBOC) amid a sharp correction in the price of shares of India’s largest mortgage lender may have hastened the process.

Given that there is a significant quantum of trade between India and China a similar backlash on investments from Indian companies/citizens may be expected from the Chinese government.