FDI Policy

[By Kartikey Sahai] The author is a fifth year student of Institute of Law, Nirma University. Introduction 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