Curtailing FDI from neighboring countries to protect domestic markets
Curtailing FDI from neighboring countries to protect domestic markets
The government of India has reviewed the extant FDI policy for curbing opportunistic takeover/ acquisitions of Indian companies due to COVID 19.
Background :
Foreign direct investment or FDI can route into India through two routes :
a) Automatic route
b) Approval route ( RBI approval )
Such a proposal is placed before RBI, DIPP, Concerned ministry of the sector in which the company wants to invest. An additional security clearance is required from the ministry of home affairs if the investment comes from certain specified countries due to security issues.
Present situation
Currently, any Non-resident except certain residents from certain countries like Pakistan, Bangladesh cab invest via the automatic route ( without any approval ) subject to each sector-wise ceilings. It doesn’t include China as of now.
Revised Position after press release ( To be given effect through FEMA notification)
Any non-resident sharing land boundary with India would now be allowed to invest in India, only under the approval route i.e all the checks, RBI approval, ministries, DIPP would have a review at what is the intent of such investment.
This notification affects investment coming from China as India shares a border with China. Also, since in case a Chinese company thinks of bypassing this notification via incorporating subsidiaries or associated enterprises in other countries, the term “beneficial owners of investment” has been carved out to avoid any leakage.
No effect on FPI and FII investments
However, any investment via foreign portfolio investment or foreign institutional investors in the secondary market either in debt or equity won’t be affected by this as restriction has been placed on FDI as of now. However, SEBI has asked for FPI Holdings in listed companies last week.
Conclusion and afterward
Such a step would ensure that domestic companies bearing the heat due to COVID 19 are protected from desperate takeovers due to cash and balance sheets getting dried.
However, in case a similar restriction is being placed on FPI and FII, the Indian startup market would be ready to face bottom rock valuations.
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