How Will India’s Revised FDI Policy Impact Future Chinese Investment?

Posted by Written by Nishtha Yadav Reading Time: 4 minutes
  • Under the revised foreign direct investment (FDI) policy, India’s bordering countries will require mandatory government approval for investing in any sector.
  • This policy change is only applicable for FDI; other routes of foreign investments, such as FPI and FII, remain unchanged.
  • Experts assume the government will approve new FDI proposals in non-sensitive sectors, such as manufacturing and technology in 8 to 10 weeks – which is the prevailing case under the government approval route.

This month, India’s official trade and investment regulator, the Department of Promotion for Industry and Internal Trade (DPIIT) notified changes to the country’s foreign direct investment (FDI) policymaking government approval mandatory for FDI inflows from India’s neighboring countries.

In the notification issued by DPIIT – transfer of ownership of any existing entity or future FDI in an entity in India, directly or indirectly, resulting in beneficial ownership falling within this restriction will require mandatory government approval.

Basically, this means that investors from India’s neighboring countries will need to seek the Indian government’s approval before taking forward their FDI investment – for the foreseeable future.

The revised FDI policy will impact Chinese investment the most – as investors and firms from China have invested in various sectors in India. For instance, China has heavily invested in the technology sector, including, start-ups, mobile apps, and smartphone manufacturing as well as in sectors such as automobile, manufacturing, renewable energy, power, and industrial machinery. There is also a considerable investment by Chinese firms in India’s digital ecosystem, especially in-e-commerce, online payments, and healthcare.

However, Chinese investors are still seeking clarification from the government on the time period of government approval, impact on their existing investment, and impact on other foreign investments. Here we answer the most common questions on this topic.

Does the FDI policy change apply to other forms of foreign investment?

No, the notification issued by DPIIT is only applicable for FDI.

These changes are not applicable to any other form of foreign investment like foreign portfolio investment (FPI) and foreign institutional investment (FII).

China has 16 FPIs registered in India – 15 are in Category I, which is for government and government related foreign investors such as Central Banks and Sovereign Wealth Funds. Category I have easier compliances, lower taxation, and disclosure requirements. One FPI from China is registered under Category II, which typically comprises of hedge funds.

Through FPI, People’s Bank of China has over one percent stake in HDFC, an Indian banking and financial services company. Also, CIFM Asia Pacific Fund, a joint venture with JPMorgan Asset Management Co., holds 13.5 percent stake in Indian banks and infrastructure firms, among others.

How will the policy change impact existing Chinese investment in India?

Existing investment from China will not be impacted as it has already been processed by the DPIIT / government authorities.

However, industry experts are of the understanding that in certain cases of investment, investors may have to seek government approval. For example, if there is further capital infusion in the company by a Chinese investor – either to maintain their stake in the company or to increase their FDI stake – then the Chinese investors will have to seek India’s regulatory approval.

Even global transactions by Chinese investors can be impacted in certain cases. For instance, a European target company, which has an India subsidiary, proposed to be acquired by a Chinese investor, will now require prior approval in India – in addition to the applicable approval process for investment from Europe. This is because the beneficial ownership of the Indian entity will be deemed to have been transferred to the Chinese investor.

How does the policy impact Indian entities where Chinese investors hold a major stake?

In case of entities where Chinese investors are a major stakeholder, or in case of a wholly owned subsidiary of a Chinese firm, the revised policy may not affect anything – as there will be no change in the ownership of the company. It is important to note that the purpose of these changes in the FDI policy is to prevent hostile takeovers of Indian firms by foreign investors from India’s neighbors, including China.

But if a Chinese investor wants to increase their stake in the company – despite being a shareholder – they will likely have to seek approval from the government. However, the approval process time may be shorter in such cases.

What is the expected timeline for the government’s approval process?

While the government is yet to announce the processing time, it is expected that it would range between 8 to 10 weeks for non-sensitive sectors, such as technology and manufacturing. It may take longer for sensitive sectors, such as defense.

Investment from China may also be subjected to security clearance from the Ministry of Home Affairs, which may take additional one or two weeks.

Since all FDI inflow from India’s neighboring countries will be scrutinized by the government, the approval time may increase. It is expected that the government will clear proposals swiftly as it does not want investments in India to be affected by and large.

What clarifications are needed from the government?

The notification does not clarify the status of investments from Hong Kong, which is treated as a special administrative region. DPIIT tracks investment data from Hong Kong and China separately, so it is unclear if this revised policy is applicable to investment from Hong Kong or if the beneficial owners are based in Hong Kong.

Chinese investors should seek expert advice from foreign investment professionals as they plan their investments into India under the revised FDI policy.

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write for more support on doing business in India.

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