The government by “Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry” has revised the present FDI policy of 2017 on 17th April 2020 by issuing a Press Note No. 3(2020 Series). The government has revised the para 3.1.1 of extant FDI policy enclosed in Consolidated FDI Policy, 2017 and has inserted two subsection to it. According to the new inserted section 3.1.1 (a)“An entity of a country, which shares land borders 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.”Further, the new inserted section 3.1.1(b) says that “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.”
What did this amendment mean?
In India Foreign Direct Investment (FDI) can be done by two routes, namely government and automatic. Now, this revised FDI policy makes it mandatory for the countries sharing a land border with India viz. China, Pakistan etc. to compulsorily take the government route for investment in India. That means they have to take the prior permission from the government of India before investing in India. This notification also restricted the transfer of any existing or future FDI owner to these countries, directly or indirectly, without the approval of the government of India.
What’s the reason behind it?
The Subject line of the press note released says that the FDI policy is revised “for curbing opportunistic takeover/acquisition of Indian Companies due to current Covid-19 Pandemic.”
Since the Covid-19 Pandemic has started the Indian industries has suffered a great jolt and are in difficult times. The reason that the countries sharing a land border with India are specifically prohibited is linked with the fact the government fearing such opportunistic takeover/acquisition of Indian industries by China. The fact that China, since the pandemic started, has been investing at a very large scale in the countries which were been badly hit by the COVID-19 is of grave concern for India. Further, due to COVID-19 pandemic, Indian firms are badly hit and are in grave need of investments which makes them vulnerable to such takeovers.
The total current and planned Chinese investment in India has crossed $26 billion, as per the estimates in March 2020.[i] The Indian government feared that taking advantage of the bad monetary condition due to the Covid-19 pandemic China might found it as an apt opportunity to have significant control over the Indian enterprises.
The decision was greatly appreciated among the industrial and political fraternity of India. However, the government decision will certainly have its downside as well. The government of India was trying hard to make Chinese mobile companies set up their manufacturing unit in India this will certainly become difficult after this decision of revising FDI policy. However, this will certainly bar the opportunistic takeover by China of Indian firms at the time of distress.
[i] Priscilla Jebaraj, Government nod mandatory for FDI from neighbouring countries The Hindu (2020), https://www.thehindu.com/business/Economy/government-nod-mandatory-for-fdi-from-neighbouring-countries/article31379229.ece (last visited May 8, 2020).