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India, with an eye on China, Amends its FDI Rule to Shield Indian Companies under Pandemic

By April 20, 2020 May 1st, 2020 No Comments
India, with an eye on China, Amends its FDI Rule to Shield Indian Companies under Pandemic.

India, with an eye on China, Amends its FDI Rule to Shield Indian Companies under Pandemic.

The government of India has amended its FDI Policy today to curb opportunistic takeovers of Indian Companies due to Covid-19 pandemic by the neighbour countries. As per the new amendment, FDI investments into Indian companies from neighbouring countries will now require a nod from the government. This will be applicable to all countries that share a land border with India – such as China among others.

It is pertinent to note the following

1. The transactions under pipeline wherein the definitive documents have been signed but "Closing" is pending will also get impacted and would require approval of government for any foreign direct investment into the target company. The same applies to tranche based investment.

2. 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 above, such subsequent change in beneficial ownership will also require Government approval. The question which needs to be clarified herein would be, the percentage of ultimate beneficial interest in these countries which will trigger the government approval. Does this mean if a 0.1 percent of the beneficial interest is with a citizen or a body corporate based out of these countries will trigger this clause ? The language suggests that but the intent needs to be clarified by the government.

3. It may also be noted that this restriction is only applicable for Foreign Direct Investment and the investment made under "Foreign Portfolio Investment Route" will not have any impact due to this amendment.

4. FDI in LLPs will not be allowed from these countries as FDI in LLPs is only permitted in LLPs operating in sectors / activities where 100% FDI is allowed through the automatic route. Government may need to relook into this aspect.

5. Conversion of external commercial borrowing into equity shares in case of default or otherwise in terms of the definitive documents already negotiated and signed between the parties will also get impacted in terms of this amendment.

The press note is an attempt to place a check and give the government an opportunity to review such takeovers and investments coming into India from specific jurisdictions. Further, it is to prohibit particularly Chinese companies from acquiring Indian companies many of which have lost significant value due to the covid-19.

Author: Prashant Jain, Co-Founder & Partner.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at  prashant@samistilegal.in.
Updated as on April 18, 2020
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