Foreign Investment

Chinese Investment in India under the Government Approval

Chinese Investment

The Government of India has taken bold steps by shifting Chinese Foreign investment in India from the Automatic route to Approval Route. In reference to Government Order – DPIIT File No.: No. 5(5)/2020-FDI Policy, dated 17/April/2020.

The government of India is forecasting that Chinese investment may lead to a severe disruption of the economy. Chinese investment firms and HNI are actively investing in India. In 2019, China contributed $8 billion Foreign Direct Investment. As you aware that globally, business is widely affected after lock-down; the Business valuation is likely to decline by 10 % to 50% due to the COVID-19 pandemic. In such a slowdown scenario, Chinese investment may be deployed for a hostile takeover of Indian business and the effort of the government to save future losses to the business and economy.

The Point to be noted that the current change in FDI regulation has not banned the Chinese investment in India, but any investment which is coming from China directly or indirectly by the Chinese resident or Citizen or via fund house or VC or PE shall be highly monitored and DIPP will approve it after review of the purpose and end-use of the fund, verification of PRC Profile, Business or Industry where the fund will deploy and other compliance shall meet by the investor before investing in India.

In this analysis, we will cover the end to end analysis of the current regulatory changes introduced by the Government of India. Way forward and its Impact Analysis.

  • FDI Regulation in India.
  • Change in FDI Regulation.
  • Importance of ODI Approval for Investor.
  • Process of obtaining Approval – FDI under Government Route.
  • Impact on Industry.
  • Exit strategy.
  • FAQ.

Who Regulates Foreign Investment in India?

The authorities that regulate FDI in India are the DIPP (Department for Industrial Policy and Promotion), RBI (Reserve Bank of India), FEMA (Foreign Exchange Management Act), and Ministry of External Affairs. All these authorities overlook the development of Foreign Direct Investment in India. Foreign Direct Investment in India can be got through the following routes:

Foreign Investment in India
  • Automatic Route – Only Reporting is required No Approval.
  • Approval Route – Prior Permission is Required From Government. 

Is there any change in Industry or business activity where investment by Chinese is banned?

No. There is no change in investment activity. Earlier prohibited sectors like defence, space, and atomic energy will continue as the Prohibited sector. All other sectors which were opened for Chinese investment in India are now shifted to government approval from Automatic approval. Major slowdown in Chinese investment will be experienced for investment in fintech, Energy, Infrastructure, technology, manufacturing, NBFC, Ecommerce, Payment business, and others.

What is the current amendment in the FDI law in India?

This amendment was brought out to the consolidated FDI policy, which was released by the government in 2017. This move was brought out to deter hostile/ optimistic takeovers by foreign companies. The Foreign Direct Investment Amendment was brought out in Paragraph 3.1.1 of the consolidated FDI policy, and it included two sub-points 3.1.1(a) and 3.1.1(b). The following were the amendments which were considered for foreign direct investment amendment:

  • Investment can be made by a Non-Resident in India subject to the prohibited sectors.
  • An investor who is present in the country that shares the land borders with India (Indirectly Chinese investment is targeted) or is considered as a beneficial owner for such an investment that enters India, or invests in India.
  • This form of investment is required through the approval route/ government route.
  • Also, there are inclusions regarding any existing or future Foreign Direct Investment regarding the transfer of ownership to an entity in India; then, such transfer would also be subject to the approval of the government. This would also go through the government route or the approval route.
  • This means that any country that is sharing a border with India would come under the purview of this amendment. This amendment would apply to China, Bangladesh, Afghanistan, Nepal, Bhutan, and Myanmar.

Importance of ODI Approval for Chinese Citizen

An investment by the Chinese Citizen or resident is under government approval. ODI Approval is mandatory for all types of investment, directly or indirectly. We have experienced that medium and small-enterprise have been investing outside China without obtaining the ODI Approval from PRC Authority. Typical small investor’s set-up companies in Singapore or Hong Kong and invest in India. The PRC Companies must obtain ODI Approval in China and then invest in India. Since November 2016, the People’s Republic of China (PRC) has been increasing its scrutiny of outbound direct investments (ODI) made by PRC companies. Consistent with that trend, the PRC formalized the regulatory pathway for ODI transaction approval on August 18, 2017, by issuing the Opinions on Further Guiding and Regulating Outbound Investment (关于进一步引导和规范境外投资方向的指导意见) (the Guiding Opinions). The Guiding Opinions were jointly issued by the PRC’s National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the People’s Bank of China, and the Ministry of Foreign Affairs.

  • The ODI Approval in China takes close to six months (Approval Rate is 50%).
  • FDI Approval for Chinese investor will take 6 to 8 weeks In India (Approval Rate 90%).

What is FDI Approval under Government Route?

Foreign Investment approval under the government route is a complex process; it required an in-depth understanding of the business you are investing in. As Citizen of ROC, if you are investing directly or indirectly in India, then you may to obtain ODI Approval from PRC Authorities. However, if the fund is invested from a standalone entity in Singapore or Hong Kong, then no such approval is required (in our view). However, while approving, the government has the power to direct you to provide all such information or explanation to prove the source of funds as well as the intent of your investment in India. In the approval process of investment under the government route, the expertises of a consultant would provide guidance on your application.

FDI under government route can be obtained by following steps –

  • Online Registration with Government reporting Portal.
  • Business Valuation.
  • Business Plan of the entity where investment is to be made.
  • Audited financial statement of the Investee and Investment Company.
  • Time Required 70 Days from the date of submission.
  • The government may ask you to meet in person for a face to face discussion.

What all funding instruments allowed for Chinese investor in India?

Big relief for Chinese business; they can still infuse funds in India if the intention of such a fund is not to gain control in the Indian Company at a later stage.

funding instruments allowed for Chinese investor
  • ECB (External commercial borrowings is Allowed) only for existing shareholders.
  • Non-convertible preference shares are allowed.
  • Non-convertible debentures are allowed.
Disclaimer External Commercial borrowings in another mode of infusion of funds in India by the foreign investor. Please be noted that the current government has only amended the provisions of FDI, which can be used for a hostile takeover of the Indian enterprise. However, the regulation of non-equity instruments should not be changed. Typically ECB process takes close to two weeks for realization of fund and credit of fund in the Account.

As a fintech Company or loan app aggregator, you should know that end-use of the ECB fund will be applicable. Please note that NBFC, who is a partnership with you for Co-lending, can raise ECB (Assuming no change in ECB Regulation) you can read a detailed ECB analysis click here. In our Opinion, Chinese Fintech companies should be able to raise ECB to meet the working capital requirement in India.

What will the treatment of FDI Received in the Account before April 17, 2020?

  1. Fund Credited in the Account, but FDI Reporting is not done, and share allotment is not completed – In such circumstances in our view, RBI should approve the FCPGR application. RBI may transfer to the Approval route. This is completely discretionary power with the DIPP.
  2. Fund Credited in the Account, and Share allotment is completed, but FC-GPR Approval is pending – On examination of the application under the old regulation, the investment in the company should be approved.
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Will current change in FDI norms have impact on new Company registration or takeover of Existing Company by the Chinese Citizen?

change in FDI norms
  • New company registration

After the change in the regulation, you can register a software company in India with Indian shareholders and Indian directors with very nominal capital. After a bank account is being opened, the company can apply for Government approval. The government approval can be obtained within 6 to 8 weeks.

  • Takeover of Existing Company

For taking over the existing fintech or Software Company by the Chinese Citizen or Chinese resident, government approval would be required.

  • Impact on NBFC takeover

If an Application for change in ownership is pending in the RBI by Chinese lead new shareholders, in such circumstances, the applicant should first apply for government approval for takeover the company or any acquisition of equity shares in the NBFC Company.

  • Impact on New NBFC Registration

If you have applied for NBFC registration and file is submitted to the RBI then there will be no impact on the application for the COR. In case you haven’t infused the capital and FDI Reporting is pending, in such circumstances you will require to obtain government approval first for investment and thereafter you can apply for NBFC License as an chinese applicant.

Can a Chinese be appointed as a director in the Indian Company?

Yes. Chinese Citizens can be appointed as executive or non-executive directors in India. 

Do I still need to apply for government approval even in case I am not holding shares in the investment company?

investment company
Please be noted that Equity Investment by Chinese beneficiary or Chinese resident even under the umbrella structure will require government Approval.

Can I send money from China or Singapore or Hong Kong as service fees or software service fees?

Yes. Chinese resident are allowed to transfer money against ANT software or technical services obtained in India without government of India approval. Currently there is no amendment in the export of service rules.

Who comes under ROC (Republic of China)?

The residents of ROC (Republic of China) include Taiwan, Kinmen, Matsu, and the Pescadores. ROC excludes Hong Kong and Macau. The Investment in India by ROC shall be highly scrutinized, and the FDI Approval shall continue under government route until further notification from the Government of India. Investment made by a Hong Kong & Macau resident or Citizen may continue to enjoy the investment in India under automatic route. Investments under the automatic route can be made without any prior approval from the government.

Would countries that have strong political connections with ROC (Republic of China) come under the scrutiny of the new FDI policy (“Government Approval)?

Foreign Portfolio Investors (FPI) are regulated by the Securities Exchange Board of India (SEBI).SEBI scrutinises rules related to FPI. According to the FPI rules, a single FPI is not allowed to have more than 10% of the equity in a listed company. If the ownership is more than 10%, then it will come under the FDI rules, which require government approval from neighbouring countries sharing borders. Any investment which is having strong political connections with China would come under the scrutiny of the new FDI Policy (“Government Approval”). This would be if the investment is more than 10% on the equity ownership of a listed company by a FPI. Clubbed funds for the equity ownership will also be considered for FPI rules.

What are the forms of control over FPI?

Control over a Foreign Portfolio Investor (FPI) can be through the beneficial ownership (BO). Beneficial ownership can be determined in the following ways:

  • By owning more than 25% of the corpus;
  • If there is a nomination of representatives on the fund’s board; and
  • Control over the senior management of the FPI.

An investor who has lesser than 25% control over the corpus fund can still establish some form of control through the senior management of the FPI.

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Which countries would come under the scrutiny of the as per SEBI FPI Rules?

Foreign Portfolio investors who have beneficiaries in the following countries would come under the scrutiny of SEBI FPI rules: Mongolia, Pakistan, Bhutan, Nepal, Afghanistan, Bangladesh, Myanmar, Taiwan, North Korea, Yemen and Iran.

What would happen if the amount of equity ownership is more than 10% for an FPI?

If the equity ownership exceeds more than 10% in the listed entity, then FPI Rules would come under the purview of the FDI rules. If an investment is through the neighbouring countries sharing the same borders with India, then government approval would be required.

What would happen to investments in China which are routed via the above countries?

If investments are routed to China from the above countries, then they would come under the scrutiny of the new regime of Government approval. Some of the South East Asian Countries are not allowed to invest in India due to the restrictions placed by the FATF (Financial Action Task Force). Therefore investing through another country in China would be under the scrutiny of the new Foreign Investment rules for government approval.

Would a person resident in China be able to avail exit options on their Chinese Investment in India due to the new FDI rules?

An exit option is the process when a foreign investor exits from the country after performing business in India for a particular period. Exit options by foreign investors occur only when there is no sufficient rate of return on their investment in the country.

According to the new rules, if there is any form of fresh infusion of funds in India or existing Chinese investors/ persons, resident in China want to exit their investment would have to take the government approval route. The new rules would apply to the transfer of any form of ownership. Hence these rules would also apply to exit options. Any form of subsequent change of beneficial ownership would also be considered as a transfer of ownership.

What will be the position of ECB or loans taken Chinese Investors after the new rules?

External Commercial Borrowings (ECBs) are loans taken by Indian Companies. Foreign investors and portfolio investors issue these loans.

If an External Commercial Borrowing (ECB) or commercial loan is taken and the loan gets converted into an equity investment, then government approval would be required for external commercial borrowings. If the ECB has a maturity period of more than ten years, then the above rules would apply. If a loan gets converted to equity, then the above FDI norms for government approval would apply for Chinese Investments.

How will these regulations influence the repatriation of capital back to China? Can a Chinese investor transfer funds back to China?

Currently, the government has not provided any rule about the repatriation of funds back to China. However, if there is any form of transfer of ownership of funds, then government approval would be required.


The changes in the Foreign Direct Investment policy in India has made an added layer of compliance for neighbouring countries that share land borders with India. While the Government of India has taken a nationalistic approach to strengthen the economy, it would be a detriment to foreign investors. Apart from the DIPP, the RBI and SEBI have also made it mandatory for countries that source investment through China to be scrutinised. The countries that have nationalistic ties with China would also have to go through the government approval route. This policy would also apply to an external commercial borrowing (ECB) taken by an Indian company from a Chinese Investor. In light of the above it can be said that the move taken by the government of India is positive for Indian economy, however it would deter further investments from China.

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