India’s protectionist conduct also stems from the same underlying motivation that has guided foreign investments measures in these countries, i.e., a strong and valid impetus to protect certain essential businesses and their assets, which, if acquired by Chinese investors at distressed valuations during these unprecedented times, may impair the country’s national and security interests. The announcement of the proposed FDI policy amendments followed, merely a few days after a public disclosure regarding the People’s Bank of China increasing its stake from 0.8% to 1.01% in Housing Development Finance Corporation Limited, a listed company whose stock prices dropped by approximately 25% due to the COVID-19 outbreak, in the month of March alone.

It is also imperative to note that India has not imposed a complete “prohibition,” on Chinese foreign investment in the country, but rather, has solely prescribed an approval requirement. The introduction of such an approval process will provide the government with visibility on proposed investments, and allow it to segregate substantive investment proposals, i.e., proposals which are in the best interest of companies and their stakeholders, from the opportunistic ones.

Additionally, it remains to be seen whether India will follow the U.S. route of rejecting certain transactions (pursuant to the oversight regime of the Committee on Foreign Investment in the U.S.), in the name of national interests. In an instance of such a move, the U.S. government had, as recently as March 6, 2020, rejected the acquisition of StayNTouch, Inc. by Beijing Shiji Information Technology Co., Ltd. through a Presidential Order, on the grounds that, amongst other things, this acquisition could pose a potential threat to U.S. national security.

Even as the proposed amendments to the FDI policy aim to protect domestic business interests, companies, particularly some of India’s largest start-ups, which are heavily backed by existing Chinese investments, are set to be severely impacted. Such companies will undoubtedly face significant challenges in further capital raising from their existing investors, with imminent delays due to pending government approvals, and likely contractual disputes in the case of non-receipt of such approvals. For these companies, receiving speedy approvals for proposed investments may come down to their ability to demonstrate that a proposed investment is substantive, i.e., that it is in the best interest of the Indian company and its stakeholders, and, as such, is not “opportunistic.”

Further, under international law, the proposed FDI policy amendments may be considered as a sovereign act, and as such, if they unlawfully interfere with contractual relationships or contractual exit options, such amendments could become the subject of claims by foreign investors under relevant bilateral investment treaties concluded by India.

Moreover, legislative clarity on the scope of direct and indirect “beneficial ownership,” in the corresponding amendments to the Indian foreign exchange regulations, is still awaited. Such legislative clarity is urgently required and will be indispensable in ascertaining whether the proposed amendment will also extend to investments made by funds/companies in which Chinese entities have minority investments.

Even though India is not alone in instituting reforms in the foreign investment review regime in the context of the COVID-19 outbreak, the Chinese embassy in India has asserted that this particular policy measure is violative of the World Trade Organization’s principles of non-discrimination, and has urged the Indian government to reconsider the move. However, the global alignment with respect to this policy measure, as well as a valid possible defence on the grounds of protection of national interests, would together make it difficult for China to maintain this stance.

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