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Mandatory Government Approval for all FDI from neighboring countries to curb Opportunistic Advantage

While India continues to fight against the spread of the deadliest coronavirus disease and prepare to rebound itself from the economic crises resulting therefrom, it has amended its Foreign Direct Investment (FDI) Policy to curb opportunistic takeovers / acquisitions of Indian entities, whether directly or indirectly, from neighboring countries including China.  The Department for Promotion of Industry and Internal Trade, the Ministry of Commerce and Industry (DPIIT) has issued Press Note No. 3 (2020 Series) dated 17 April 2020 to amend the FDI policy to mandate Government Approval for all foreign direct investments from neighboring countries.  As per FDI Policy, a non-resident entity can invest in India in all sectors except sectors / activities which are prohibited subject to the conditionalities stipulated therein. The investments in most sectors fall under automatic route which doesn't require any approval from the Government. Presently, a citizen of, or an entity incorporated in, Bangladesh or Pakistan can invest only under the Government route (i.e. after obtaining approval from the Government). Further, investors from Pakistan cannot invest in defence, space, atomic energy and sectors/activities prohibited for foreign investment. As per the amended policy, an entity of a country, which shares land border with India, or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, the transfer of ownership of any existing or future FDI in an Indian entity, directly or indirectly, resulting in the beneficial ownership falling in the hands of investors from neighboring countries will also require Government approval. Therefore, all FDI from neighboring countries involving either fresh investment or acquisition by transfer of ownership will require Government Approval. This requirement was earlier limited to only Bangladesh and Pakistan, but the same has now been extended to other neighboring countries including China, Nepal, Myanmar, Bhutan and Afghanistan. The use of the terms 'beneficial owner' and 'beneficial ownership' implies that any attempt to indirectly acquire / invest in an Indian entity will also be put under check. It will be interesting to analyse the said terms to determine the applicability of the restriction on each case.  Due to the outbreak of COVID-19, India was put under 21 day nationwide lockdown, which has now been extended till May 3. Due to these unprecedented circumstances, the business operations of domestic companies have come to a standstill resulting in lower valuations and shortage of cash. The Government has taken this decision to protect these Indian entities from falling prey to the opportunistic takeovers / acquisitions at predatory prices. Several other countries have also taken similar steps to ring fence their domestic businesses.


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