Foreign Direct Investment: Changes in India

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This article was written by Caitlin Sharp

Have there been any recent changes to the Foreign Investment rules in India?

Yes, on 17 April 2020 the Indian Government by way of Press Note no. 3 ("Press Note") announced a tightening of FDI restrictions to curb "opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic".  Prior to this announcement, the general trend in India since 2017 had been in the direction of liberalising the FDI regime.  The recent changes followed the People's Bank of China having increased its stake in HDFC, India's largest non-banking mortgage provider, from 0.8 percent to 1 percent in circumstances where HDFC's share price had fallen by around a third due to the economic disruption caused by the COVID-19 pandemic. This announcement was then brought into effect through an amendment to India's exchange control regulations on 22 April 2020.

If yes, please provide a brief summary of the changes

The new FDI restrictions have effectively removed the "automatic route" under which foreign direct investment may be made without government approval (subject to certain sectoral caps, pricing norms and other attendant conditions) for investors from certain specified jurisdictions.  All such investment from those jurisdictions now requires the prior approval of the Indian Government.  It is unclear at this stage what the Indian Government's approach will be in providing such approvals, including whether it will determine whether to grant approvals on a sector by sector basis or whether regard will be had to the nature of the investment (i.e. whether a controlling stake is being acquired), or the type of investor and extent of beneficial ownership held by an entity/individual from a Restricted Country (defined below) in such investor.

The new restrictions only apply to foreign entities from China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan (being countries which share a land border with India) (Restricted Countries) or where the beneficial owner of the acquiring entity is a citizen of, or situated in, a Restricted Country.  There were restrictions on citizens and/or entities of Bangladesh and Pakistan (with the majority of the restrictions being on the latter) prior to the COVID-19 pandemic and so the new restrictions are seen as largely being aimed at Chinese investment into India.

The requirement for government approval also applies to subsequent direct or indirect changes in beneficial ownership of any Indian company which results in the beneficial ownership being acquired by entities/beneficial holders of a Restricted Country.

It is unclear at this stage how the definition of "beneficial owner" will be interpreted by the Indian government.  It is also unclear whether specific carve-outs will be introduced for private equity funds and other pooled investment vehicles that may have LPs or investors from Restricted Countries or who are managed by entities/individuals from Restricted Countries. It is also unclear at this stage how the Indian Government will treat transactions involving funds with Hong Kong or Taiwan-based LPs or investors. Without any clarity on ownership thresholds from the government, it is recommended that any PE fund -- even one with negligible investment from Chinese LPs, proposing to invest in India should seek approval.

This recent change has had a significant impact on the M&A landscape in India, not just in terms of potential or planned investments but it has also impacted:

  1. existing investments (in that that any transfer of FDI to an entity/ beneficial holder of a Restricted Country now requires prior Government approval);

  2. transactions where the definitive documents have been signed prior to the change but were yet to close;

  3. ongoing global transactions with closings in multiple jurisdictions involving an acquirer that is an entity/beneficial holder from a Restricted Country where the India-leg of the transaction may be impacted by this approval requirement; and

  4. distressed companies seeking bridge financing and emergency funding in the form of FDI from potential investors from Restricted Countries.

What was the rationale for the changes?

The Press Note released by the Department for Promotion of Industry and Internal Trade states that the FDI policy was tightened to prevent any opportunistic takeovers or acquisition of Indian companies due to the COVID-19 pandemic.  The changes come at time of increased border tension between China and India and a growing concern that Chinese companies were looking to take advantage of the COVID-19 pandemic to acquire strategically significant Indian assets at reduced prices. The understanding was that the move was to protect sensitive sectors including banking, financial services and critical infrastructure

Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?

The Indian Government has characterised the policy as a temporary move to protect India's economy during the pandemic.  However, the new restrictions are not subject to any time limitation and will remain in force until the FDI policy is formally amended or revoked.

There are reports that the Indian Government is set to propose tighter scrutiny of new "foreign portfolio investors" from China and Hong Kong.  The foreign portfolio investment route in India allows foreign portfolio investors (such as governments, central banks, sovereign wealth funds, asset management companies, mutual funds, pension funds and hedge funds) who have obtained an FPI license to invest in shares, debentures or warrants of listed companies representing up to 10% of the total paid up equity capital (on a post-issue, fully diluted basis) of the company or up to 10% of the paid-up value of each series of capital instruments of the listed company.

It has been publicly reported that the Reserve Bank of India has rejected the applications of several Indian start-ups who were applying for a Non-Banking Financial Company (NBFC) license in part due to concerns around Chinese capital coming into local start-ups via tax havens like Mauritius, where many venture capital and private equity funds are registered.

There is no suggestion yet of any forced divestment by Chinese investors of their existing investments in India or any need for retrospective Government approval for existing investors.

Are there any particular sectors that are affected the most?

The new restrictions applicable to India's neighbouring countries apply across all sectors and don't apply to strategically sensitive sectors alone.  In the current political environment between India and China, it is likely that the new restrictions will significantly reduce Chinese FDI into India and will increase the timeframes and add uncertainty to any investments which are proposed to be made by Chinese companies.    

The Indian tech start-up sector has attracted large investments from China and is expected to be particularly impacted by the new restrictions. Many Indian start-ups including Paytm, Snapdeal, Ola, Swiggy, Flipkart, Zomato, and Big Basket are backed by leading Chinese investors, such as Alibaba, Tencent and Shunwei Capital.  Other sectors which have seen significant Chinese investment include the energy sector, smartphone sector, internet consumer sector and optical fibre sector.

What is the outlook for foreign investment in India?

The short term outlook for foreign investment into India (especially from China) is negative and such concerns are likely to continue for the duration of the COVID-19 crisis and will depend on the effectiveness of measures taken to limit the economic impact of the pandemic.

That said, foreign investment into India has been steadily growing long-term.  Despite a sharp decrease in foreign investment in developing economies in Asia as a result of the COVID-19 pandemic, and the resulting lockdown measures and supply chain disruptions, we expect that India will continue to attract foreign investment in the medium term.  For investors from China and other jurisdictions covered by the new restrictions, there will be an added cost of doing business in India but it remains to be seen whether this will affect the long-term outlook for foreign investment into India.

What it is your advice to foreign investors in India?

The FDI regime in India is complex and constantly evolving.  Foreign investors should seek specialist advice at an early stage in the investment process to ensure any FDI restrictions are identified and taken into account in the structuring of the deal.  

Foreign investors from China and other countries which share a land border with India and their advisors will need to become familiar with the new restrictions which affect the foreign investment framework, obtain guidance on the process for obtaining the required approvals and factor in the additional time and cost associated with obtaining the required approvals in their deal processes.

Does the Indian Government coordinate with other government agencies, including the antitrust regulator?

The approval process for foreign direct investments into India involves the submission of a proposal through a single government portal.  The Department for Promotion of Industry and Internal Trade (DPIIT) then assigns the proposal to the relevant sectoral ministry and notifies other concerned agencies such as Ministry of External Affairs and Department of Revenue and Ministry of Home Affairs for security clearance (if applicable). The DPIIT / relevant ministry has the discretion to make a reference to regulators and other government agencies (including the Competition Commission of India) at the time of granting approval.


This publication is intended to provide a high level overview of FDI trends and regulation in India. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice India law, and works closely with local lawyers to support our clients' needs in India. We are grateful to Trilegal for their co-operation on this publication.

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