Overview

Government amends FDI Policy to curb opportunistic takeovers/acquisitions of Indian companies due to COVID-19 pandemic

Introduction

The current COVID-19 pandemic situation coupled with the nationwide lockdown have majorly impacted the Indian economy. In these times of plummeting stock and asset prices, the Indian companies were staring at hostile takeovers and/or acquisitions by several overseas companies. This has been the general experience in various other countries as well and something which they are trying to block.

In light of the aforesaid, together with the recent event of People’s Bank of China having raised its stake in the Housing Development Finance Corporation (‘HDFC’) to a little over 1 percent, the Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry, Government of India, with a view to protect the interest of the Indian companies, reviewed the Consolidated FDI Policy, 2017 and vide Press Note No. 3 (2020 Series) dated 17.04.2020 has revised the extant FDI policy to discourage opportunistic and/or hostile takeovers/acquisitions of Indian companies.

Analysis

The present position as per the extant FDI policy states that a non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh and Pakistan or an entity registered in any of these countries can only invest under the government approval route. Additionally, for investment flowing in from Pakistan, sectors/activities such as defense, space and atomic energy are strictly prohibited, in addition to the sectors/activities already in that category.

The amended para 3.1.1 (a) states that an entity of a country which shares 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 approval route. The additional prohibitions for Pakistan still hold. Additionally, the amendment also states that the transfer of ownership of an existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1 (a), the change will also require government approval.

The stated amendment shall come into effect from the date of the FEMA notification.

Concluding Remarks

This is a welcome step aimed towards strengthening the Indian companies by putting in place the requisite protectionist measures and policies. This move serves to regulate rather than restrict FDI in these testing times arising on account of COVID-19 pandemic. Moreover, in order to protect the interest of their domestic companies, several countries including but not limited to Australia, Germany and Spain, have already tightened their respective policies on foreign takeovers, so as to ensure careful scrutiny of any foreign investment flowing into their nations.

It may be conclusively remarked that this move is in line with the protectionist policies implemented globally, to avoid hostile takeovers and/or acquisitions of companies which have become potentially vulnerable on account of COVID-19.