Amendments to Indian FDI Policy

The government’s recent press note[1] making amendments to the Foreign Direct Investment (“FDI”) policy, followed by the notification of the amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019,[2] has gathered much attention. The amendment now requires investments from countries sharing borders with India to be made only with the approval of the government.

The motive behind the amendment is to “curb opportunistic takeovers / acquisitions of Indian companies” when share prices are falling due to the economic impact of the COVID-19 pandemic. It is speculated that the government has reacted to a minor stake acquisition by the People’s Bank of China in Housing Development Finance Corporation, however the contents of the amendments till date do not seem to affect such foreign portfolio investments. In any case, without naming any country, the amendments are quite clearly aimed at Chinese investments taking advantage of COVID-19.

The amendments have been found wanting on key aspects (such as beneficial owner definition and applicability to special administrative regions of neighbouring countries) that should have been legislated upon by the government. As a result, Indian companies, foreign investors, and their advisors, are busy interpreting the scarce words in the amendment and assessing the impact on prospective as well as completed investments.

While the Indian law amendments have been widely reported, India is not the only jurisdiction to have a COVID-19 law on foreign investments. Since the pandemic has affected economies all around the globe, other jurisdictions have preceded India’s amendment in announcing restrictions on foreign investments. Here’s a look at how some of the other countries have addressed this concern.

Changes to FDI Laws in Other Jurisdictions

The European Commission (“Commission”) was one of the first to address the issue of opportunistic FDI by issuing Guidance to the Member States[3] (“Guidelines”) on March 25, 2020 where the Commission warned member states of an increased risk of attempts to acquire companies via FDI. These Guidelines were issued in the context of an earlier FDI Screening Regulation[4] (“Regulation”) introduced by the Commission on March 19, 2019 which aimed to establish a framework for screening of FDI into the European Union.

The Commission recommended that member states make full use of the FDI screening mechanisms introduced by the Regulation to address cases where acquisition or control of particular businesses, infrastructure or technology could pose a risk to security or public order due to the current economic conditions.

Foreign investments in Australia are governed by the Foreign Investments and Takeovers Act, 1975. On March 29, 2020, the Australian Treasurer announced temporary changes to its foreign investment review framework to protect national economic interest from the spread of COVID-19.[5]

The changes make all proposed foreign investments subject to approval from the Foreign Investment Review Board by doing away with the monetary screening thresholds.[6] The treasury, while announcing these changes, highlighted that Australia continues to welcome foreign investment, but in light of the COVID-19 pandemic, screening is considered essential to protect domestic businesses, jobs and swift economic recovery.

In March 2020, Japan’s Ministry of Finance launched a public consultation for amendments to its Foreign Exchange and Foreign Trade Act.[7] The proposed amendment reduces the notification threshold from 10% to 1% before completion of any share purchase by foreign investors in ‘designated business sectors’, i.e., those which have a direct impact on national security.

Indian amendment vis-à-vis Other Jurisdictions

Evidently, the impact on valuations of companies due to COVID-19 has been viewed as a threat not only in India, and other jurisdictions such as the United Kingdom and the United States of America are also considering such amendments.

Other countries have however reacted differently, and India is the only jurisdiction to limit investments from specific territories. The Indian government could have taken a leaf out of Japan’s book by making the amendments specific to industries which it saw as being under threat. Currently, the amendment could result in funds drying up in industries which would not mind foreign investment. The Indian government could have also made the amendments temporary (or at least indicated that they would be temporary), like the Australian amendment, which could have helped the sentiments of foreign investors towards India.

Authors:
Pranav Atit, Senior Associate
Armaan Srinivasan, Associate

Footnotes:
[1] Press Note 3 of 2020 issued by the Department for Promotion of Industry and Internal Trade on April 17, 2020, available at: https://dipp.gov.in/sites/default/files/pn3_2020.pdf
[2] Notified on April 22, 2020, available at: http://egazette.nic.in/WriteReadData/2020/219107.pdf
[3] Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets issued on March 25, 2020, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation) available at: https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf
[4] Regulation (EU) 2019/452 of the European Parliament issued on March 19, 2019, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0452&from=EN
[5]https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/changes-foreign-investment-framework
[6] This is achieved through the introduction of the Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations, 2020 (available at: https://www.legislation.gov.au/Details/F2020L00435) which amended the extant Foreign Acquisitions and Takeovers Regulation, 2015.
[7]Amendment to the Foreign Exchange and Foreign Trade Act available at: https://search.e-gov.go.jp/servlet/Public?CLASSNAME=PCMMSTDETAIL&id=395122004&Mode=0 and English version at: https://www.mof.go.jp/english/international_policy/fdi/kanrenshiryou_20200314.pdf