[By Kartikey Sahai]
The author is a fifth year student of Institute of Law, Nirma University.
India and China, two of the top 10 economic superpowers of the world have, in a way, put to terms, their political debacle with India blowing a major cog in the wheel of China’s upper handedness, by putting restrictions on Chinese investment in India. On April 17, 2020, the Department for promotion of Industry and Internal Trade (“DIPP”) brought in an amendment to the extant Consolidated FDI Policy, 2017 (“Press Note 3”).[i] Consequent to this revision, an amendment was also brought about to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 on April 22, 2020.
Prior to the introduction of this amendment, investments by non-resident entities were allowed in those sectors which are not prohibited as per the extant FDI Policy, with the exceptions of entities based out of Bangladesh and Pakistan. Post the inception of this amendment, the Government of India has revised this policy to include the provision for investment by entities based out of countries sharing land borders with India (read: China) or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can now invest only after obtaining prior approval from the Government of India.
The objective of the revised policy, as stated in the Press Note 3, is to curb opportunistic takeovers/acquisitions of Indian based companies during the subsistence of the Covid-19 pandemic, in lieu of the People’s Bank of China buying out 1.01% stake in HDFC bank, worth approximately 1.75 crores shares of the bank.[ii] However, this revision brings about a crucial question relating to the financial sector into beckoning. Is the Indian industrial contingent ready to exclude Chinese investment into Indian companies, at the behest of government approval?
Increased reliance of Indian industries on Chinese investments
As per the quarterly fact sheet on FDI released by the DIPP up to March 2019, China ranks 18th out of the 164 countries that have FDI equity inflows in India, amounting to a total of INR 13,954.82 crores.[iii] Sectors such as the automobile industry (60%), the metallurgical industry (14%) and the electric equipment industry (4%), amongst others, attract the maximum FDI equity inflows.[iv]
Another startling fact that needs to be taken account while evaluating the recent policy revision is that before the current NDA government came into power in 2014, the FDI equity inflows from China never crossed the 1000 crore mark, but as soon as the new government came into power, for two years consecutively, the figures reached the staggering mark of INR 3066.24 crores in 2014 and INR 2196.11 crores respectively.[v] Furthermore, as per the Secretary-General of India-China Economic and Cultural (“ICEC”) Council, China invested an estimate of about INR 2000 crores in 2017, in comparison to INR 700 crores invested by China in Indian companies in 2016.[vi] Moreover, despite issues such as Doklam which are clouding the bilateral ties between the two countries, India-China bilateral trade have amassed a whooping USD 71.18 billion in 2016 and USD 84.44 billion in 2017.[vii] Additionally, with the changes in the extant FDI policy of India, investments through indirect route have to be taken into account as well, such as that of INR 3500 crores invested by the Singapore subsidiary of the techno-giant Xiaomi.[viii]
Interpreting ‘Beneficial Ownership’ under the revised FDI Policy
The revised FDI policy, as amended by the press note of April 2020 seeks to hinder non-approved foreign investments into India from countries where the beneficial owner of an investment into India is situated or resides. However, the term beneficial ownership has not been defined anywhere, neither in the extant FDI policy, nor the FEMA rules.
To analyze the problem in an in-depth manner, a glance may be had at Section 90 of the Companies Act read with Companies (Significant Beneficial Owners) Rules, 2018 which define the term ‘significant beneficial owner’, which is analogous to beneficial ownership. The relevant rules have laid down certain criterion for determining beneficial owners, such as individuals, who either directly or indirectly, hold 10% of the shares or 10% of the voting shares or have a right to receive a minimum of 10% of the total distributable dividend or have a right of significant control in such company. These Rules provide further clarifications as to how to ascertain the significant beneficial owner. However, as per these rules, only an individual may be deemed to be a significant beneficial owner. On the other hand, the revised FDI policy merely refers to the term ‘beneficial owner’, without clarifying whether it applies to individuals or body corporates as well.
The Prevention of Money Laundering Rules, 2005 prescribe that a beneficial owner is a natural person, who alone or jointly in conjunction with a natural or artificial person, holds above 15% or 25% control over capitals or profits of the relevant company.[ix] Moreover, SEBI has also reiterated that a similar definition be adopted for the determination of beneficial ownership for the purpose of KYC as well.[x] However, such definition cannot be used for the purpose of ascertaining the meaning of beneficial ownership under the revised FDI policy, as these legislations were brought about mainly to nab the accused alleged to have been involved in laundering money and thus hold an altogether different connotation.
International investment obligations envisioning the debacle
The revised FDI policy has not put forth an enforceability date from which this revised policy will be brought into force. If India is intending to go big this time, it might as well grant retrospective effect to the tune of 5 to 10 years to strike a dagger in the heart of China’s involvement in the Indian market. This revision in the extant FDI policy of India has not brought about happy reactions with China terming this move as ‘discriminatory and against the general trend of liberalization of trade’.[xi] Even when it comes down to the bilateral obligations of India, it is not at the right side of things. The Government should be mindful of its obligations under the Agreement for the Promotion and Protection of Investments (‘Agreement’). Although, this Agreement had been terminated by the Indian contingent in 2017,[xii] yet it should not lose sight of its obligations under the surviving provisions of this Agreement.
Paragraph 2 of Article 16 of the agreement provides for the surviving clause of this bilateral investment treaty (‘BIT’) which states that from the date of the termination of this agreement, this BIT shall be in force till 15 years from such date. As India had terminated its obligations under this agreement in 2017, it has to keep in mind to not enforce the revised FDI policy with effect from pre-2017 (date of termination of the agreement). Even though the exceptions as provided by the agreement, in Article 14, state that India may make exceptions in lieu of its essential security interests or in circumstances of extreme emergency, yet such arguments would come out as futile when the fact that these revisions have only been brought against certain countries and not every country uniformly are looked at. Moreover, such arguments would be put to the cleaners when we look at the figures of Chinese investment in Indian companies over the past few years and hence, such an approach would not pan out to be thorough.
Conclusion and Recommendations
India is not the only country to have realized the aftermath that this pandemic could bring about. The European Union, Spain, Italy, et al. have led the way in blocking unregulated Chinese FDI in the wake of the pandemic and attempts of hostile takeovers by Chinese corporations.[xiii] However, this move requires much consideration by the Indian government in lieu of the increased reliance on Chinese investments in the past few years. Moreover, a lot of clarifications need to be brought about by the DIPP in order to simplify the effect of this revision.
Since, India has put an unrestricted check on Chinese FDI, the following questions, in the form of clarifications, need beckoning:
- Would companies which have already subsisting Chinese investment be able to raise funds, without government intervention, by way of rights issue?
- What would be the source of raising capital for companies which are subsidiaries of Chinese companies?
- What would be the situation if a company based out of a third country, which is in effect the parent to an Indian company, gets taken over by China?
- With China forming such a pivotal part of Indian FDI, would the time taking process of government approvals for such investment hamper fruitful investments as well?
- Would investments coming in from Hong Kong, which is a special administrative region of China, be considered as Chinese investments? What about those investments that indirectly have Chinese backdrops involved?
The above are a short list of unanswered questions that beckons the government response in order to strengthen an otherwise brave move by the Indian contingent and a move toward self-reliance as a country.
[i] Department for Promotion of Industry and Internal Trade, Press Note No. 3 (2020 series), FDI Policy Section, (April 20, 2020), available at https://dipp.gov.in/sites/default/files/pn3_2020.pdf.
[ii] Rajesh Mascarenhas, China’s central bank buys 1% stake in HDFC, Economic Times, (April 20, 2020), available at https://economictimes.indiatimes.com/markets/stocks/news/chinas-central-bank-holds-1-stake-in-hdfc/articleshow/75104998.cms.
[iii] Department for Promotion of Industry and Internal Trade, Fact Sheet on Foreign Direct Investments (FDI) from April, 2000 to March, 2019, Quarterly Fact Sheet, (April 20, 2020), available at https://dipp.gov.in/sites/default/files/FDI_Factsheet_27May2019.pdf.
[iv] Department for Promotion of Industry and Internal Trade, FDI Synopsis on Country China, FDI Statistics, (April 21, 2020), available at https://dipp.gov.in/sites/default/files/FDI_Synopsis_China.pdf.
[vi] Suparna Dutt D’Cunha, How China Is Positioning Itself Among India’s Top 10 Investors Despite Bilateral Differences, Forbes, (April 22, 2020), available at https://www.forbes.com/sites/suparnadutt/2018/05/01/how-china-is-positioning-itself-among-the-top-10-investors-in-india-despite-bilateral-differences/#133c01a81dac.
[viii] Ananth Krishnan, Following the money: China Inc’s growing stake in India-China relations, Brookings, (April 22, 2020), available at https://www.brookings.edu/research/following-the-money-china-incs-growing-stake-in-india-china-relations/.
[ix] Sub rule (3) of Rule (9) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
[x] Securities and Exchange Board of India, Circular No. CIR/IMD/FPI&C/59/2016, (April 21, 2020) available at https://www.sebi.gov.in/sebi_data/attachdocs/1465796415786.pdf.
[xi] Geeta Mohan, China objects to India’s revised FDI policy that blocks takeover of stressed firms, India Today, (April 23, 2020), available at https://www.indiatoday.in/india/story/china-objects-to-india-s-revised-fdi-policy-that-blocks-takeover-of-stressed-firms-1669096-2020-04-20.
[xii] ET Bureau, China keen on bilateral investment pact with India, Economic Times, (April 23, 2020), available at https://economictimes.indiatimes.com/news/economy/foreign-trade/china-keen-on-bilateral-investment-pact-with-india/articleshow/63523147.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.
[xiii] Geeta Mohan, As global economies dwindle, world wakes up to China’s hostile takeovers amid pandemic, India Today, (April 24, 2020), available at https://www.indiatoday.in/business/story/world-wakes-up-to-china-hostile-takeovers-of-companies-amid-covid-19-pandemic-1669240-2020-04-21.