Centre Revises Foreign Direct Investment Policy After Chinese Bank Raises Stake In HDFC

The Central Government has amended the Foreign Direct Investment (FDI) policy with an aim to restrict opportunistic investments in Indian companies by neighboring countries amid economic slowdown due to the outbreak of COVID-19.

A press release from the Department for Promotion of Industry and Internal Trade on Saturday, April 18, stated the reasons for a revised policy, which said, "curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic."

According to the amendment, FDI investments into Indian companies from neighboring countries will now require a mandatory approval from the government.

The revised rule says, "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 a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route."

"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."

This has been mandated for all the countries sharing borders with India which include Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh and Myanmar.

This restriction will also apply if the beneficial owner of the investment is an entity situated in or a citizen of such countries.

According to reports, the move comes after the People's Bank of China (PBOC) raised its stake in Housing Development Finance Corp. Ltd (HDFC) from 0.8 per cent to 1.01 per cent during January to March quarter.

Notably, the guidelines do not specifically mention China and have instead have called upon to end free access to entities based in China by referring to it as "country which shares a land border with India".

Investors from Pakistan and Bangladesh are already covered under the rule. However, China with the financial capability to indulge in such hostile takeovers during the pandemic-slowdown isn't included.

The decision will come into effect from the date of the Foreign Exchange Management Act (FEMA) notification.

Earlier, reports suggested that market regulator Securities and Exchange Board of India (SEBI) was monitoring equity transactions in India by Chinese companies and banks.

Such transactions have come under heavy scrutiny at a time when the share prices of companies have slumped due to the economic impact of the pandemic.

Also Read: 'Should Have COVID-19 Vaccine By 2021, Will Not Patent It': Serum Institute CEO