Foreign Investment Regulatory

India revises FDI Policy, govt approval must for Chinese investment

India restricts FDI from China

Alarmed by Chinese Central Bank raising stake in India’s leading private lender HDFC, the Indian government today announced the proposal to modify the FDI Policy to bar investment under the automatic route from land bordering countries. The proposal will be effective from date of notification to the effect to be issued under FEMA. Subsequently, all investments from bordering countries will require prior government approval.

The change comes at a time when the People’s Bank of China has raised its stake in HDFC from 0.8 per cent in March 2019 to 1.01 per cent as of March 2020. People’s Bank as per recent public data owns close to 1.75 crore shares (worth about Rs 3,000 crore) of HDFC Bank. It it is pertinent to note – the investment from People’s Bank in HDFC Bank is under FPI route.

FDI Changes – China Investment

According to the new policy (Press Note 3 of 2020), “an entity of a country that 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“. The new rules also impose prior government approval for the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in beneficial ownership falling in the hands of citizens from bordering countries like China.

Also read: RBI guidelines on Payment Aggregators

Soon after the news of People’s Bank increasing its stake in HDFC broke, Congress leader and ex-AICC president Rahul Gandhi had suggested restriction on such investments by foreign interests, in the backdrop of the economic slowdown that has weakened Indian corporates.

The countries which share land boundaries are as follows (in the descending order of length of shared boundaries) :
Afghanistan (through POK).

A similar restriction is already in place against investments from Bangladesh and Pakistan. 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.

Chinese FPI under increased scrutiny

As reported by Economic Times on April 15, SEBI has asked custodian banks to disclose details of `ultimate beneficial owners’ of foreign portfolio investors (FPIs) based in China and Hong Kong. Chinese entities are receiving backlash worldwide amid allegations that China is using coronavirus fueled recession to takeover distressed assets.

FDI restrictions tightens worldwide

The European Union (EU) has issued a guidance note on foreign investment to its members on March 25, 2020. The EU members Germany, France, Italy, and Spain along with Australia have recently tightened foreign investment rules. United Kingdom is in the process of altering its foreign investment regime.

UK is also probing the investments by Chinese state-owned investment firm China Reform in Imagination Technologies. Imagination is a leading British technology firm that makes smartphone and tablet chips.

Imagination Technologies was bought by Canyon Bridge, a Cayman Islands-based entity that is in turn majority-owned by China Reform, in the year 2017. The UK government did not intervene then. However, when China Reform attempted to put four directors on Imagination’s board this month and thus take control of the company, British MPs raised alarms. The chief executive Ron Black of Imagination tendered his resignation earlier this month.

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