Foreign Direct Investment (FDI) is one of vital economy driving forces to generate capital for businesses and employment creation – In particular during this time of economic turmoil created by Covid19, some struggling economies will be more reliant on FDI to an extent to put them back on track from ongoing economic slump.
However certain cash rich companies are considering the economic slump as a golden opportunity to take control of companies which are fighting to survive or on verge of closure via FDI route.
Indian companies are no exception to this proposition – there could be companies who are in dire need of capital generation for survival. In such atmosphere, there is a great risk that foreign entities will attempt to gain control of these struggling companies via infusion of capital in the form of FDI at low valuation without any scrutiny under the automatic FDI route.
It seems the central government has sensed the probability of hostile/opportunistic takeover of Indian entities by foreign entities.
In any attempt to elude the prospect of hostile/opportunistic takeover of Indian entities by foreign entities, the Central Government has tweaked FDI policy via notification (Press Note 3 of 2020) to pitch in right measures to ensure that no foreign entity incorporated in bordering nations will gain undue economic advantage via exploring weak economic conditions of certain Indian entities.
This is a timely move by central government as certain companies incorporated in border nations are on course to gain control of Indian entities. The new FDI policy is aimed at to foil unethical ideologies/business practices of certain foreign entities.
Gist of new rulings under FDI policy as follows:
· Any FDI by foreign entities located in border nations or if beneficial owner of FDI invested in India is located in such border nations should get nod and clearance from central government.
· Pakistan based entity/citizen will be authorized to make investments in Indian entities subject to approval of central government.
· No Pakistan based entity/citizen will be permitted to make investments in defence, space, atomic energy and other sector where FDI is expressly prohibited.
· Any beneficial ownership stated in tweaked FDI policy is reflection of ownership transfer (directly/indirectly) of existing/Future FDI – Central government should consent to such subsequent modification in beneficial ownership.
Prior to Press Note 3, certain FDI restrictive rulings were applicable to Bangladesh and Pakistan. However, horizon of application of such FDI rulings has now been extended to all border sharing nations (China, Pakistan, Bangladesh, Bhutan, Nepal and Mynamar).
Experts are of opinion that new FDI rulings are framed keeping China in mind as Chinese entities made an investment of 24.4 billion dollars since 2014. It is surprising to note that until 2014 total investment was 1.6 billion dollars.
In 2015, Zack Ma made 40% investment in central government backed Paytm. Startup ecosystem is receipt of 4 billion dollars from China as 30 startups are funded by Chinese entities.
Most recent Chinese investment is of Rs. 3,000 crores into HDFC bank by China’s People Bank via procurement of 1.75 crore shares just in 3 months duration (January to March, 2020).
Further China based venture capital funds are deliberating to infuse funds into Indian startups engaged in diversified fields (Innovation, Technology, E-Commerce, Online Classified Platforms, Education and Content).
Central government decision to tweak FDI policy is highly influenced by representations made by various quarters over the fear of hostile/opportunistic takeovers of Indian entities - These entities are weathering a storm in the form of Covid19 and are on tight spot as economic uncertainty looming large around these entities.
It is not just India that tightened its FDI policy few other countries also strengthening their FDI Policy to protect the economic interest of companies with stressed assets from clutches of opportunistic investors.
The central government further allocated a ‘Fund of Funds’ to the tune of INR 10,000 crores to facilitate a buy upto 15% equity in entities with high credit rating and yet to be listed on stock exchange to generate capital. This prospect is yet get final nod from central government.
The Securities and Exchange Board of India (SEBI) is also vigilant and introspecting deep into transactions of Chinese funded Indian entities to elude the prospect of hostile/opportunistic takeover.
The latest FDI ruling will put brake to speed of dragon wheels and will serve as a shield to Indian entities which may be on the verge of falling into hands of hostile/opportunistic investors in these troubled times.
The Author, Bhumesh Verma is Managing Partner at CorpCommLegal with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters.
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