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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 
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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] 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]) 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 M&As.
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 importance.
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] 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] Losing these investments will have an impact disproportionate to its value, given the deepening penetration of technology in every sector in India.[5] 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.
* 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 series.
** 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.
[3] Ibid., p. 2.
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].
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: Policy options for the Multilateral Investment Court,’ June 15, 2020
All previous FDI Perspectives are available at

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Karl P. Sauvant, Ph.D.
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Columbia Center on Sustainable Investment
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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
p(212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask] | t: @CCSI_Columbia

"A G20 Facility to Rekindle FDI Flows", "Enabling the Full Participation of Developing Countries in Negotiating a WTO Investment Facilitation Framework", "Concrete Measures for a Framework on Investment Facilitation for Development", "Making FDI more Sustainable", "Facilitating Sustainable FDI by...", "An International Framework to Discipline Outward FDI Incentives?", "The Case for an Advisory Centre on International Investment Law", "An Advisory Centre on International Investment Law: Key Features",  "Incentivizing Sustainable FDI: The Authorized Sustainable Investor", "The Potential Value-added of a Multilateral Framework on Investment Facilitation for Development",  "International Investment Facilitation: By Whom and for What?", "Towards an Investment Facilitation Framework: Why? What? When?" are available at .

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