India toughens rules on investments from neighbours

NEW DELHI: India has stepped up scrutiny of investments from companies based in neighbouring countries, in what is widely seen as a move to stave off takeovers by Chinese firms during the coronavirus outbreak, Reuters reported on Saturday.

India’s trade ministry said in a notification dated April 17 the changes to federal rules on investment were meant to curb “opportunistic takeovers/acquisitions”. It did not mention China.

Investments from an entity in a country that shares a land border with India will require government approval, it said, meaning they cannot go through a so-called automatic route.

“These times should not be used by other countries to take over our companies,” a senior government official told Reuters.

The government said that an entity of a country which shares a land border with India can invest only after receiving government approval.

"However, an entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route," a government order said. “The new rules will also apply to 'the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly.

Similar restrictions are already in place for Bangladesh and Pakistan. Sectors such as defence, space, atomic energy and sectors continue to remain prohibited to them.

But up to now, they have not applied to China and India’s other neighbours including Bhutan, Afghanistan, Myanmar and Nepal.

“This will certainly impact sentiment among Chinese investors. However, greenfield investments will not be impacted,” said Santosh Pai, a partner at Indian law firm Link Legal that advises several Chinese companies.

Australia has also said all foreign investment proposals will be assessed by a review board during the coronavirus crisis to prevent a fire sale of distressed corporate assets. Germany has taken similar measures.

A February report by research group Gateway House said Chinese foreign direct investment into India stood at $6.2 billion.

China’s Bytedance has plans to invest $1 billion in Indian, while automakers including Great Wall Motor Co Ltd and MG Motor, a unit of China’s SAIC, have said they intend to invest millions.

Delano Furtado, a partner with law firm Trilegal, said the notification may also impact Chinese companies with existing investments in the country.

“Any follow-on investments in those entities may now require approvals,” he said.

India’s notification also said government approval would also be needed to change the ownership of an Indian entity that had existing foreign investment.

“This step seems to be aimed at having a hostile takeover control measure against China, given that it is investing in and acquiring companies all over the world. The government, according to press note 3, would like to evaluate Chinese investment on a case-to-case basis,” said Atul Pandey, a corporate law practitioner.

Chinese investment was allowed under the automatic route, but for in sensitive areas like telecom, defence and national security etc., he added.

The Chinese have stakes in several Indian start-ups: Flipkart has an investment from Tencent (about 5 per cent) and Alibaba owns a significant stake in Paytm.