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View: The grey areas in India’s new FDI rules

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India’s dependence on China is likely to continue in the short to medium term. Even during this Covid-19 crisis, India is relying quite a bit on test kits and equipment coming from China.Sidharrth Shankar & Shantanu Jindel

India has reviewed its FDI policy to introduce prior GoI approval for investment by an entity of ‘a country sharing a land border with India’, or if the potential investor is situated in, or is a citizen of, any such country.

The note also specifies that in the event of a direct or indirect transfer of ownership of any existing or future FDI in an entity in India, resulting in the beneficial ownership falling within the purview of the conditions mentioned above, such a change in beneficial ownership will also require GoI approval.

It isn’t clear how broad the terms ‘indirectly’ and ‘beneficial ownership’ will be interpreted while implementing the revised scheme. Also, whether GoI approval will also apply for follow-on investments by companies from such bordering countries.

The aim of the review seems to be to ensure that foreign companies who have access to funds do not take advantage of the economic damage wrought by Covid-19 lockdown. What is novel is its applicability being restricted to countries ‘bordering India’ — read: China; the trigger most probably being the recent follow-on investment by the People’s Bank of China in HDFC.

It’s the lack of clarity that makes one wonder if the note was a kneejerk reaction, or a well-thought-out strategy. Can companies with existing investment from China raise funds by way of rights issue without GoI approval? If an Indian entity is a subsidiary of a Chinese company, how will it raise capital in the future?

The fact that its parent company is a Chinese corporation won’t change even if GoI doesn’t grant approval for a future fund raise. This becomes relevant in case of companies that don’t have their roots in China, but are now indirectly controlled by Chinese corporations as a result of mergers and acquisitions in the US and Europe.

For example, Volvo is a Swedish auto brand and a subsidiary of China’s Geely.

The note also doesn’t clarify what happens if, say, the parent of an Indian company based out of Singapore gets acquired by a Chinese corporation.

As the ultimate beneficial owner of the Indian company would be a Chinese corporation, would the overseas transaction also require GoI approval? This becomes trickier if an Indian entity has a parent company listed on a stock exchange, as a result of which any change in shareholding may not be controllable.

Even the private equity industry would have to examine the structural and financial links to China. For example, could a private equity fund that pools funds in Singapore, and has majority of its limited partners from China, invest in India?

India’s dependence on China is likely to continue in the short to medium term. Even during this Covid-19 crisis, India is relying quite a bit on test kits and equipment coming from China.

In the long run, India would want to see itself step out of China’s shadow.

If India has to go down that route, Indian companies will have to play a critical role and, possibly, take on Chinese corporations in various spheres. And that can only happen if they have shareholders whos interests are aligned with India’s growth, and not with ‘countries sharing a land border with India’.

The writers are partners,J Sagar Associates

(Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

Source: indiatimes.com

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