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India Shifts Goalposts on Chinese Investments: Why is this a lot worse than it sounds?

By – Ramesh Vaidyanathan

In a rather dramatic turn of events triggered by the COVID-19 pandemic, India has revised its foreign direct investment (FDI) policy and mandated that investors based out of bordering countries will require prior Indian government approval for their investments into India companies. With a few minor exceptions and certain sector specific caps/prohibitions, these investments were until now under the ‘automatic approval’ category for most sectors. The current move is triggered by the anxiety to curb opportunistic takeovers or acquisitions of Indian companies by (Chinese investors!) taking advantage of their distressed state and beaten down valuations.

While this sounds reasonable at first blush, some see this as yet another “Vodafone’ moment for India. As we await the details (bracing ourselves for the devils that we are so often accustomed to), a few critical questions arise:

  1. When will this be effective from and for how long? Do companies have the ability to accept investments before the anticipated FEMA notification kicks in?  There is unfortunately no grandfathering clause for further investments in existing ventures, seriously jeorpardising follow-on rounds of investments into a multitude of growth and early-stage companies?

  2. What will constitute beneficial ownership? Will the FEMA notification borrow the definition of beneficial ownership from company law or money laundering laws? The cynic in me thinks that this will be left open ended for investors to speculate on, lawyers to opine on and the government to improvise on. Again, will there be any minimum acquisition thresholds for seeking prior approval?

  3. Why worry when deserving cases can always seek approvals and get in? Well, this is where it is a lot worse than it sounds.  As any lawyer or consultant will tell you, structuring of investments into India is largely an exercise to devise ways and means to sidestep government and Reserve Bank of India approvals. This in turn is necessitated by the uncertainty of the approval process, timelines and the conditions that may be imposed while granting approvals. Without either a commitment on timely approvals or a provision for deemed approvals, India could be shooting itself in the foot.  There is also no guideline on how the discretion to grant approvals may be exercised.

  4. It is trite to say that international investors expect predictability and consistency from investment and tax regimes.  Are we writing another inglorious chapter to our track-record on this front? With over USD 1.80 billion flowing into India from China in the last 5 years in sectors ranging from automobile, electrical equipment and technology, the unseen effect of this policy shift will play out in the years to come making it ‘difficult’ to do business in India.

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