A. Background
Covid-19 pandemic and consequent shutdowns and lockdowns across countries have also brought the economies to grinding halt. The share prices of listed companies across the globe are falling to a significant level and making them easy targets for opportunistic buyers. On the other hand, number of new cases in China have reduced significantly and it was able to re-open its economy at the time when world was still struggling with lockdown and crisis.
In addition, Chinese enterprises, including state enterprises, have been on a buying spree across Europe and North America to take advantage of covid-19 induced economic crisis. As per the news articles, Europe saw a spike in requests from Chinese firms and funds for proposals on targets in Europe.
Considering the situation, the European Union warned that the economic slump from the pandemic could leave the bloc’s key industries vulnerable for hostile takeovers. On March 25, 2020, the European Commission called on the member states to take all necessary measures to protect strategic assets and technology from foreign investments that could threaten public policy objectives.
To mitigate such risks, foreign investments control measures have been taken across the globe. For instance-
- Italy – Italian government expanded what it calls the ‘Golden Power Law’, meant to restrict foreign investment in sensitive areas to include a large number of other sectors, from transport and financial sector to data storage.
- Spain – Spanish government enacted a royal decree making it mandatory to obtain prior government authorization on any FDI proposal outside the European Union if certain threshold is exceeded, in a strategic sector.
- Germany – German cabinet approved the measures, which applied to takeover bids from United States and enterprises outside the European Union.
Besides European countries, other countries, such as Australia, Canada, United Kingdom, United States of America have also taken measures to control foreign investments and hostile takeover.
Recently, India has also added its name in the list of such countries, as it has made certain amendment in its foreign exchange laws. It appears that the Government action was triggered due to increase in stake of People’s Bank of China (Chinese central bank) in HDFC Ltd. to 1.01% from 0.8%.
Before understanding the changes introduced by India, let’s first have a look at the basic framework of Indian foreign exchange laws.
B. BASIC FRAMEWORK OF INDIAN FOREIGN EXCHANGE LAWS
In India, foreign exchange regulations are mainly governed by one act, i.e., Foreign Exchange Management Act, 1999 (popularly known as FEMA). Similar to other Acts, there are rules, regulations, notifications, circulars, orders, etc. under FEMA.
Foreign investment into Indian sectors can fall under two categories:
- Prohibited Sectors – These sectors are not open for foreign investments, such as lottery, chit funds, gambling and betting including casinos etc.
- Permitted Sectors – These sectors are open for foreign investments, subject to conditions and thresholds, if any.
However, foreign investments in these sectors may need specific government approval depending upon the sector, threshold, and other specified conditions.
Foreign investments which do not need government approval are referred as investments under automatic route. And, Foreign investments which need government approval are referred as investments under approval route.
After understanding the basic framework of Indian foreign exchange regulations, let’s discuss the changes which have been introduced by the Indian government to curb hostile takeover situation amid covid-19 pandemic.
C. AMENDMENT IN INDIAN FOREIGN EXCHANGE REGULATIONS
Under FEMA, there are rules called Foreign Exchange Management (Non-debt Instruments) Rules, 2019. The government has amended these rules and specifically provided that any investments into equity instruments of an India entity from entities based in countries sharing land borders with India, or where the beneficial owners of such investments are situated in such countries or are citizens of such country, which shares a land border with India, will require prior approval from the Indian Government.
In simple words, there are seven countries which share land borders with India, i.e., are Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan and Afghanistan. Before amendment in Foreign Exchange Management (Non- debt Instruments) Rules, 2019, country specific approval was required only in case of foreign investments from Pakistan and Bangladesh. However, now government approval will be required for inbound foreign investments from all 7 countries sharing land borders with India.
D. IMPACT OF AMENDMENT ON FOREIGN INVESTMENTS
As stated above, any investment in Indian entities from the above-referred seven countries will have to go through approval route. Obtaining government permission before investment means scrutiny check and delays, as approval may take 6-8 months. The advisers to Chinese firms have raised concerns over amendment.
Unlike other 6 countries, China has major existing and planned investments in India. As per Brookings research group, the same is estimated at $ 26 billion. Chinese auto firms such as SAIC’s Morris Garages and Great Wall have placed major bets in India. At least 18 out of 23 Indian start-ups, including Paytm, Snapdeal, Ola, Swiggy, Zomato, and Big Basket are backed by leading Chinese investors, such as Alibaba, Tencent, and Ant Financial. Chinese investments are a part of the technology ecosystem – in start-ups, mobile apps, and smartphone manufacturing and assembly, to name a few.
As per new rules, all new investments will have to go through screening process which will take time and severely hit deals and investment timelines. Considering the same, the Government sources have unofficially indicated that they are planning to fast track investment proposals for some sectors.
In addition, amended rules do not address certain concerns which need further clarification from the Government end. It is expected that the Government will issue further guidelines/FAQs.
Let’s wait and watch the Government next move to ensure smooth foreign investments flow in India while ensuring safety.