YNSS LAW OFFICES

published by www.yourstory.com on 17 April 2020, [https://yourstory.com/2020/04/moral-dilemma-employers-facing-covid-19-lockdown]

–By Rohan Batra & Dhruv Sethi

 

Indian unicorns and start-ups dependent on future funding from Chinese investors should not be starved, if GoI has decided to tame the Chinese Dragon.

Press Note 3 of 2020 released by Department for Promotion of Industry and Internal Trade (DPIIT) altered India’s FDI outlook towards its prying neighbors.

With the declared objective of curbing opportunistic takeovers of Indian Companies, DPIIT revised the FDI policy to bring investments from adjoining countries under the government approval route. A protectionist measure coming close on the heels of its foreign counterparts such as Germany, Spain and Italy and understandably instigated by People’s Bank of China raising its stake in HDFL Ltd.

Of India’s 7 bordering nations, China’s contribution, as per DPIIT data, stands at INR 14,846 crores between April 2000 – December 2019. China is impacted the most.

 

Revised Policy

The revised policy took statutory form only on 22 April 2020 by an amendment to Rule 6(a) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) relating to investments by person resident outside India.

This amendment modifies the existing FDI Policy 2017 by subjecting investments from contiguous countries to government approval as opposed to automatic route not warranting such approval.

Taking China as the base case, this means-a Chinese citizen or corporation based in China cannot invest in India without seeking government approval. This extends to a Chinese entity or citizen which has beneficial owner of an investment in India.

Asides covering fresh FDIs, it prescribes government approval even when a Chinese entity/citizen acquires “beneficial ownership” of an existing or future FDI in India through a transfer of ownership, “directly or indirectly”.

For the time being, Foreign Portfolio Investor and Foreign Venture Capital Investor are out of the fray.

 

Next Steps

With fresh FDI’s or transfer of existing/future FDI’s requiring government screening, what follows?

The existing Standard Operating Procedure (SOP) for processing FDI Proposals notified on 29^th June 2017 by DIPP[1] kicks-in. The investor applicant will be required to submit the investment proposal online on the Foreign Investment Facilitation Portal with a lengthy batch of documentation. Once the proposal is filed, DIPP identifies the Competent Authority and transfers the proposal to it. For some important sectors below, the competent authorities are:

[1] https://dipp.gov.in/whats-new/standard-operating-procedure-sop-processing-fdi-proposals

 

Activity/Sector	Department
Civil Aviation	Ministry of Civil Aviation
Telecommunication	Department of Telecommunication
Countries of concern (which presently includes Pakistan and Bangladesh) which require security clearance	Ministry of Home Affairs
Trading (Single brand, Multi brand and Food Product retail trading)	Department of Industrial Policy & Promotion
Financial services activity which are not regulated by any Financial Sector Regulator or where partial regulation is required	Department of Economic Affairs
Banking (Public and Private)	Department of Financial Services

 

DIPP will also forward the proposal to RBI for comments from a FEMA perspective. The proposal will in turn reach the desks of Ministry of External Affairs and Department of Revenue.

Investments from Countries of Concern, presently including Pakistan and Bangladesh (though other land sharing countries like China do not figure yet), requires Ministry of Home Affairs’ security clearance.

All proposals are to be examined from the point of view of prevalent FDI Policy, Press Notes, FEMA/ RBI Notifications/ Guidelines issued from time to time. By the time, a decision is reached, either way, the whole process is expected to take around 10 weeks, if all goes well.

 

Muddy Waters

Besides the layered and cumbersome approval process, the revised policy lacks clarity on the yardstick for approving or rejecting an investment proposal, leaving it to the unguided discretion of the ‘Great Indian Babu’.

Moreover, the widely worded policy seeks to embrace subsequent rounds of funding in existing FDIs or where rights or bonus issue is being completed by the Indian company. Clarity is lacking on this front.

Terms “beneficial owner” and “beneficial ownership” are undefined in the amendment to the NDI Rules. The threshold limit for constituting beneficial ownership is equally wanting. Though the concept of “beneficial ownership” as defined under the Companies Act 2013 read with Companies (Significant Beneficial Owners) Rules, 2018 may come to the rescue, but GoI needs to clarify that.

GoI’s criterion for what amounts to “indirectly” transferring ownership which results in the beneficial ownership of a Chinese entity/citizen is equally missing. For instance, would a Spanish company, that is indirectly owned by Chinese company or is its subsidiary, require government approval to invest in India? Perhaps, yes. Should it not be stated in clear terms?

While the amendment is introduced to Rule 6 alone, Rule 9 of NDI Rules which permits in between transfer of equity instruments from a person resident outside India to another person resident outside India remains untouched, creating further doubts.

 

Need of the Hour

In most sectors like e-commence, automobile, private banking sector etc., attracting Chinese investments, GoI’s previous policy had permitted investments under the automatic route with a sectoral cap of at least 49%.

A speedy decision on investments proposals is, thus, key to keep the Indian ventures afloat. Perhaps, not viewing all Chinese investments with same hostility and defining criteria to segregate genuine investments from hostile attacks may be considered.

Not all is lost though. On the brighter side, this revised outlook does seem like a temporary measure and only tames the Chinese dragon and not cage it.