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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 283  July 27, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
*India’s blueprint for tackling opportunistic acquisitions during COVID-19,
with Chinese firms in mind*
* <#m_-4024991463493920369__edn1>
Hetal Doshi and Sankalp Udgata** <#m_-4024991463493920369__edn2>

In April 2020, the Indian Department for Promotion of Industry and Internal
Trade amended the Consolidated FDI Policy 2017 (revised FDI policy) with
the objective to “curb opportunistic takeovers/acquisitions of Indian
companies due to COVID-19.”[1] <#m_-4024991463493920369__edn3> The new
policy requires government approval for investments emanating from all
seven countries bordering India. The new element is that similar
restrictions previously applicable only to Bangladesh and Pakistan are
extended to other neighboring countries, with China a particular target.
The recent foreign portfolio investment by the People’s Bank of China in
India’s Housing Development Finance Corp. Ltd. (which raised the Bank’s
stake in the Indian mortgage lender from 0.8% to 1.01%[2]
<#m_-4024991463493920369__edn4>) is speculated to be the reason behind the
revised policy.

Certain critical aspects of India’s revised FDI policy include:

*Blanket approval requirement*. The revised FDI policy applies to all
foreign investments made by entities of bordering countries. There is no
minimum percentage threshold in a company’s capital, or any other similar
requirement, at which a foreign investment falls under the revised policy.

This directly undermines the new policy’s objective, as it even affects
established or minority investments with no shift in control to foreign
investors. A better method for implementing this particular clause is found
in Spain’s guidelines
regarding FDI restrictions. These specifically mention that acquisitions of
10% or more or control of companies by foreign investors fall under the
restrictions. This excludes minority investments where there is no change
of control from the hassle of government approval while curbing hostile

*Applicability to all sectors.* The revised FDI policy is applicable to all
sectors. Unlike other countries, India’s policy is not limited only to
certain critical sectors such as healthcare and defense. For instance, the
recent European Commission guidelines
regarding the implementation of stricter FDI screening mechanisms to
protect sensitive assets from foreign takeovers during the crisis is
applicable only to such critical sectors as healthcare and research
establishments. Applicability of the policy to all sectors might have a
deterrent impact on FDI inflows. To fulfil its objective of safeguarding
companies weakened due to COVID-19, the revised FDI policy should focus
only on critical sectors affected severely by the pandemic or of national

*Retrospective application of the policy*. The revised FDI policy is
applicable to transfers of ownership of any “existing or future” FDI in an
entity in India by firms located in bordering countries.[3]
<#m_-4024991463493920369__edn5> Such retrospective application of the
policy may result in chaos for committed deals, where transaction documents
have already been executed and large amounts of financial and human
resources have already been utilized.

To avoid such difficulties, the government must set a cut-off date similar
to that set by the Australian government
to implement similar FDI policy to curb opportunistic M&As. This should
specify that the amended rules will apply only to agreements and
acquisitions that will not have been entered or completed until the
specified cut-off date.

*Business impact*. Since China is the fastest-growing FDI source in Indian
start-ups, requiring prior approval for investments from Chinese firms will
make struggling start-ups wary of Chinese capital. China accounts for
nearly 20% of all investments in Indian start-ups (primarily in tech
start-ups), investing US$2 billion in 2018 and US$4 billion in 2019.[4]
<#m_-4024991463493920369__edn6> Losing these investments will have an
impact disproportionate to its value, given the deepening penetration of
technology in every sector in India.[5] <#m_-4024991463493920369__edn7>
Thus, given the uncertainties of a strict compliance process and
intervention by India’s government, the start-up industry is set to
experience a substantial drop, taking the country’s already weak GDP with
it. The government should introduce a shorter and fixed approval timeline,
especially for start-ups, to ensure timely investments.

*Beneficial ownership test*. The revised policy impacts more than bordering
countries, as it provides that, in the event of the transfer of ownership
of any existing or future FDI in an entity in India, directly or
indirectly, resulting in beneficial ownership falling within the
restriction, such subsequent change in beneficial ownership will also
require government approval. However, the new policy does not define the
terms “beneficial owner” or “beneficial ownership.” Rule 2(1)(e) of the
Companies (Significant Beneficial Owners) Rules, 2018
defines “significant beneficial owner” but it differs from the definition
of “beneficial owner” under the Reserve Bank of India (Know Your Customer
(KYC)) Directions, 2016
This needs clarification.

It remains to be seen whether these restrictions will continue after the
pandemic, and what the possible outcomes will be of this strict FDI regime.
Its objective to protect companies weakened by the pandemic or the
resulting lockdown is understandable. But there are ambiguities in the new
policy that must be clarified.

* <#m_-4024991463493920369__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-4024991463493920369__ednref2> Hetal Doshi ([log in to unmask])
is a law student at the National University of Study and Research in Law
(NUSRL), Ranchi, India; Sankalp Udgata ([log in to unmask]) is a
law student at the National University of Study and Research in Law
(NUSRL), Ranchi, India. The authors wish to thank Ravi Kant, Premila
Nazareth and an anonymous reviewer for their helpful peer reviews.
[1] <#m_-4024991463493920369__ednref3> Ministry of Commerce and
Industry, *Press
Note 3 (2020 Series): FDI Policy*, Apr. 17, 2020.
[2] <#m_-4024991463493920369__ednref4> Sajeet Manhat, “China’s central bank
hikes stake in HDFC to more than 1%,” Bloomberg Quint, Apr. 20, 2020.
[3] <#m_-4024991463493920369__ednref5> Ibid., p. 2.
[4] <#m_-4024991463493920369__ednref6> “With $4 billion Chinese investment,
desi start-ups wary of FDI-policy tweak,” *Times of India*, Apr. 19, 2020.
[5] <#m_-4024991463493920369__ednref7> Amit Bhandari, “China’s strategic
tech depth in India,” *Gateway House*, Nov. 14, 2019.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Hetal Doshi and Sankalp Udgata ‘India’s
blueprint for tackling opportunistic acquisitions during COVID-19, with
Chinese firms in mind,’ Columbia FDI Perspectives, No. 283, July 27, 2020.
Reprinted with permission from the Columbia Center on Sustainable
Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Alexa Busser, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 282, Anna de Luca and Angelica Bonfanti, ‘Investment and human
   rights: Is there an elephant in the room?,’ July 13, 2020
   - No. 281, Giorgio Sacerdoti, ‘Is USMCA really “the new gold standard”
   of investment protection?,’ June 29, 2020
   - No. 280, Catharine Titi, ‘The nationality of the international judge:
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*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *September 8-11, 2020:* CCSI will host the Global Research Alliance
   for Sustainable Finance and Investment 3rd Annual Conference
   - CCSI published a briefing note, "Government Briefing: Incorporating
   Free, Prior and Informed Consent (FPIC) into Investment Approval Processes
   that explains how governments can incorporate FPIC and meaningful
   consultation into each stage of the investment.
   - CCSI and partners call for ISDS moratorium during COVID-19 crisis and
   who are interested in adding their names to this sign-on can express their
   interest in doing so here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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Fax: (212) 854-7946
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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