Limiting Chinese FDI: Steps taken by the Indian Government

Varun Hariharan

26 Oct, 2020

The Indian Government amended their FDI policy in April 2020 with a view of limiting Chinese FDI. As per the amended policy, FDI from neighbouring countries would require prior approval from the government. There are two routes of FDI in India.

The following are the routes of FDI in India:

• Automatic Route- Here no form of prior approval is required from any government authority. A foreign company can use this route for investment in India without any consent.
• Government Route- Under the government route, prior approval would be required from the government of India. For an investment to get cleared, this route would take a longer time.

Limiting Chinese Investment

The Government considered countries that shared land borders with India under this amendment. As per the amendment, any country that shares land borders with India would have to take prior approval from the government.

Under this amendment there were seven countries listed that shared land borders with India. China was also under the list. Another amendment is the requirement of the beneficial owner or an individual that controls significant investment in the entity.

What was the percentage set for beneficial ownership for limiting Chinese Investment?

Through this amendment, the government notified that any investment coming from neighbouring countries that share land borders with India would be limited to the following:

• The meaning of beneficial ownership under the Companies Act, 2013- Any individual or entity that has more than 10 % stake in a company
• The meaning of beneficial ownership under the Money Laundering Act- Any Individual or entity that has more than 25% controlling interest in a company.

Hence if a Chinese company has major controlling interest in a particular company, then the principle of beneficial ownership is taken.

How will investments from Singapore, Hong Kong and Mauritius be Treated?

For Limiting Chinese FDI the government has taken significant steps. First and foremost, changing the requirement of compliance of FDI for neighbouring countries was one significant step. Though this decision was welcome by different individuals, critics considered that this step would hinder any form of investment activity. For limiting Chinese FDI, the government has also brought out the beneficial ownership principle, where direct and indirect control mechanisms are looked into.

Due to this Chinese companies that are present in Singapore, Hong Kong and Mauritius would come under the scrutiny of the Government of India, if the investment activity is routed by a Chinese Controlled company.

If we apply the definitions of beneficial ownership, then 10% under the Companies Act 2013 and 25% under the principles of the Money Laundering Act would be applicable to companies present in other countries.

Is the government going to reduce the percentage for limiting Chinese FDI?

In a view of limiting Chinese FDI, the government brought out the FDI policy^[1] amendment in April 2020. After this the government in September banned more than 224 Chinese applications. Companies such as Tencent and Alibaba were affected due to this.

Now the government is considering limiting even minute or minuscule investments from China. In the coming days new policy arrangements would be brought out by the government. These arrangements would limit the minimum amount of Chinese investment. The government may reduce the requirement of beneficial ownership under 10 % and 25 % under respective laws.

Conclusion

Read our article:Chinese Investment in India under the Government Approval