The Government of India has brought out rules and regulations regarding the amount of foreign d...
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.
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:
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.
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:
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.
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 –
For More information about the FDI Approval under the government route,Click here.
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.
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.
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.
For taking over the existing fintech or Software Company by the Chinese Citizen or Chinese resident, government approval would be required.
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.
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.
Yes. Chinese Citizens can be appointed as executive or non-executive directors in India.
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.
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.
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.
Control over a Foreign Portfolio Investor (FPI) can be through the beneficial ownership (BO). Beneficial ownership can be determined in the following ways:
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.
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.
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.
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.
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.
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.
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.