Foreign investment is one of the major economic contributors in building and developing the economy of any nation – accordingly, articulation and development of real time laws to accord right protection to rights of foreign investors, is one of the key variants in driving inflow of foreign investments into any nation.
Till date, the Indian government has articulated laws on various metrics, which come under the ambit of the foreign investment laws to drive the inflow foreign investments.
Impact of COVID-19 on Foreign Direct Investments
Foreign Direct Investment (“FDI”) is one of the vital driving forces of the economy which helps generate capital for businesses and employment creation. FDI is the investment through capital instruments by a person resident outside India (a) in an unlisted company; or (b) in 10 percent or more of the post issue paid up equity capital on a fully diluted basis of a listed Indian company. On 11th March, 2020, the World Health Organisation declared the novel COVID-19, which had first originated in Wuhan, China, to be a global pandemic. As part of preventive measures, the Indian Government led by Prime Minister, Shri Narendra Modi, executed a complete lockdown throughout the nation. While it was a necessary move in light of an unprecedented public health crisis, the prolonged lockdown has battered the country’s economy. According to a report released by the World Trade Organisation, worldwide trade is set to plummet to 13-32 per cent in 2020, owing to the prevailing crisis. At this time of economic turmoil created by COVID-19, some struggling economies will be more reliant on FDI to an extent, so as to put them back on track from the ongoing economic slump.
However, certain cash rich companies are considering this economic slump as a golden opportunity to take control of companies which are fighting to survive or on verge of closure via the FDI route.
Indian companies are no exception to this proposition – there could be companies who are in dire need of capital generation for survival. In such an atmosphere, there is a great risk that foreign entities will attempt to gain control of these struggling companies via infusion of capital in the form of FDI, at low valuation, without any scrutiny under the automatic FDI route.
It seems that the Central Government has sensed the probability of hostile/opportunistic takeover of Indian entities by foreign entities. In any attempt to elude the prospect of hostile/opportunistic takeover of Indian entities by foreign entities, the Central Government has tweaked the FDI policy via a notification, issued on April 17, 2020 (“Press Note 3 of 2020”) to pitch in right measures to ensure that no foreign entity, incorporated in the bordering nations, will gain undue economic advantage via exploiting the weak economic conditions of certain Indian entities.
This is a timely move by Central Government as certain companies incorporated in the border nations are on course to gain control over Indian entities. The new FDI policy is aimed at foiling the unethical ideologies and business practices of certain foreign entities. This move was possibly triggered by the fact that The People’s Bank of China bought a 1% stake in HDFC Bank, thereby having a holding of 1.75 per cent in the Indian bank.
Summarizing the New Rulings under the FDI Policy
The Ministry of Commerce’s Department for Promotion of Industry and Internal Trade (“DPIIT”) issued certain alterations to the already existing FDI policy, which can be summarized as follows:
- Any FDI by foreign entities located in the border nations or if the beneficial owner of the FDI, invested in India, is located in such border nations, should get the nod and clearance from the Central Government.
- Pakistan based entity/citizen will be authorized to make investments in Indian entities, subject to the approval of the Central Government.
- No Pakistan based entity/citizen will be permitted to make investments in defence, space, atomic energy and such other sectors, where FDI is expressly prohibited.
- If any beneficial ownership, stated in the tweaked FDI policy, is a reflection of the ownership transfer (directly or indirectly) of existing or future FDI, the Central Government should consent to such subsequent modification in the beneficial ownership.
Prior to Press Note 3, certain FDI restrictive rulings were applicable to Bangladesh and Pakistan. However, the horizon of application of such FDI rulings has now been extended to all border sharing nations i.e. China, Pakistan, Bangladesh, Bhutan, Nepal and Myanmar.
While the Indian Government has maintained that the amended policies are not targeted towards any particular country, but are a bid to curb opportunistic takeovers, the move to tighten the FDI policy was not received well by China. China criticised the move by calling it discriminatory. On April 20, 2020, a written statement issued by Ji Rong, the spokesperson for the Chinese Embassy in India, threw light on China’s stance, “The additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment. More importantly they do not conform to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open”.
Experts are of the opinion that the new FDI rulings have been framed, keeping China in mind as Chinese entities made an investment of 24.4 billion dollars since 2014. It is surprising to note that until 2014, the total investment was 1.6 billion dollars.
In 2015, Jack Ma made a 40% investment in the Central Government backed Paytm. The start-up ecosystem is in receipt of 4 billion dollars from China as 30 start-ups are funded by Chinese entities. The most recent Chinese investment is of Rs. 3,000 crores into HDFC bank by China’s People Bank via procurement of 1.75 crore shares just in 3 months duration i.e. January to March, 2020.
Further, China based venture capital funds are deliberating to infuse funds into Indian start-ups engaged in diversified fields like innovation, technology, e-commerce, online classified platforms, education and content.
The Central Government’s decision to tweak the FDI policy is highly influenced by representations made by various quarters over the fear of hostile/opportunistic takeovers of Indian entities. These entities are weathering a storm in the form of Covid19 and are in a tight spot because of the economic uncertainty, looming large around these entities.
Akin to India, few other countries have also begun the process of strengthening their FDI Policy, to protect the economic interest of companies with stressed assets, from the clutches of opportunistic investors. Under the FDI regulations issued by France on April, 28, 2020, it reduced the threshold for control regarding the acquisition of stakes by non-European investors in the share capital of strategic French listed companies from the existing 25 per cent to 10 per cent. Spain, on the other hand has imposed a 10 per cent threshold on non-European FDI flows. Italy has tightened its FDI norms as well by mandating the requirement of prior approval for acquisitions of 10 per cent or more, by non-EU-controlled investors in sectors including finance, insurance, food and health.
In India, the Central Government further allocated a ‘Fund of Funds’ to the tune of INR 10,000 crores to facilitate a buy up to 15% equity in entities with high credit rating and yet to be listed on stock exchange to generate capital. This prospect is yet get the final nod from Central Government. The Securities and Exchange Board of India (“SEBI”) is also vigilant and introspecting deeply into the transactions of Chinese funded Indian entities, to elude the prospect of a hostile/opportunistic takeover.
The latest FDI ruling will surely put a brake to the speed of the dragon wheels and serve as a shield to Indian entities which may be on the verge of falling into the hands of hostile/opportunistic investors in these troubled times.
The author is the Managing Partner at CorpComm Legal, New Delhi, our Knowledge Partner, having expertise in M&A, Private Equity, Foreign Investments and Commercial Contracts. He has authored two books on Commercial Contracts Drafting and edited one on Mergers and Acquisitions. Further information is available here.
Views are personal.
Photo Credits: Kim Kulish/Corbis
 Rule 2(2.6), Master Direction- Foreign Investment in India, 2018
 World Health Organization, “WHO Director-General’s opening remarks at the media briefing on COVID-19 – 11 March 2020” Available at https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020
 World Trade Organization, “Trade set to plunge as COVID-19 pandemic upends global economy” Available at https://www.wto.org/english/news_e/pres20_e/pr855_e.htm
 Ministry of Commerce & Industry Department for Promotion of Industry and Internal Trade FDI Policy Section, “Press Note 3” Available at https://dipp.gov.in/sites/default/files/pn3_2020.pdf
 Economic Times, “China’s central bank buys 1% stake in HDFC “, April 13, 2020, Available at https://economictimes.indiatimes.com/markets/stocks/news/chinas-central-bank-holds-1-stake-in-hdfc/articleshow/75104998.cms
 Embassy of the People’s Republic of China in India, “Statement on Indian investment policy adjustment by Spokesperson of the Chinese Embassy in India Counselor Ji Rong” Available at http://in.china-embassy.org/eng/embassy_news/t1771481.htm