Government blocks China from acquiring stake in Indian Companies

Govt. tweaks FDI norms; bars automatic investment in Indian Cos. from neighboring countries

Covid - 19 and resultant turmoil in stock market has made the Government of India to think and act fast.

By Press Note No. 3 / 2020 Department for Promotion of Industry and Internal Trade amended the FDI policy to the effect that any investments from counties which shares land border with India can be made thought approval route.

Till now, a non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. 

However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy and sectors/activities prohibited for foreign investment.

This policy has been tweaked to the effect that  an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.

In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview above, such subsequent change in beneficial ownership will also require Government approval.

This will effectively ban foreign investment from Pakistan, Nepal, Bhutan, China, Myanmar and Bangladesh and will put the proposals in Approval Route.

There were already restrictions on FDI from Bangladesh and Pakistan. Now this change is mainly targets China.

This is important as there is reports that Chinese Central Bank has acquired 1% stake in HDFC Bank. Further, there were widespread allegations that after the Covid-19 shake out of stock markets all over the world, China is aggressively buying out many foreign companies especially companies which may pose a threat to their Chinese counterparts.

Any way, we have to wait what retaliation China is going to take. Given the low investment of India in China, whatever steps taken by the China may not have much impact on Indian investments in that country.