In sharp deviation from its characteristic emphasis on boosting foreign investment, the Indian government has earlier this week, introduced policy measures placing restrictions on foreign investment in the country. Perhaps the boldest of the COVID-19 outbreak-triggered foreign policy measures of the Indian government till date, this move comes amidst sharply tanking share prices and declining overall market confidence in India, coupled with growing concerns of a global economic slowdown due to the outbreak.
While the newly proposed amendments to the Indian foreign direct investment (FDI) policy are specifically aimed at curbing opportunistic acquisitions and takeovers of Indian companies by foreign investors from all seven countries that share land borders with India, the largest impact of these amendments can be expected to be felt in relation to investments from China. In this context, if a transaction results in the beneficial ownership of an investment in an Indian entity being held by an entity situated in China (including, Hong Kong), or by a citizen of China, then, pursuant to the proposed FDI policy amendments, such transaction will require prior government approval.
Significantly, the proposed FDI policy amendments are in line with the protectionist foreign investment measures implemented by several countries across the globe in the face of the COVID-19 outbreak, including many of the European Union countries (such as Spain and Italy), the U.K. and Australia.
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.
Contributed by: Iqbal Khan, Partner; Amrita Rana, Associate
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