Key Takeaways: Recent amendment in FDI policy for foreign investment Ambiguities relating to the amendment Probable impact of the changes in the policy Overview of other countries' rule for strategic takeovers WTO principles and inference

1. COVID-19: Revision in FDI
Policy for Foreign
Investment
CA Divakar Vijayasarathy

2. Research Credits
Gracelin Lita
CA Jugal Gala

3. Legends used in the Presentation
FDI Foreign Direct Investment
GoI Government of India
SPV Special Purpose Vehicle
WTO World Trade Organisation

4. Presentation Schema
Introduction The Change in FDI Policy Probable Effects of the Change
Overview of Rules in other
Countries
WTO’s Principle and Inference Way Forward

5. Introduction
COVID-19 continues to wreak havoc with the global economy which has
resulted in a great deal of uncertainty in the transactional space
However, this unprecedented environment could afford opportunistic
buyers the chance to acquire or invest in companies that have been
weakened by the crisis
Thus, COVID-19 has prompted some countries to take stringent approach
towards screening of foreign investments
Accordingly, the Government of India has reviewed the existing FDI
policy for curbing opportunistic takeovers/acquisitions of Indian
companies due to the current pandemic

6. The Change in FDI
Policy

7. Existing Criteria relating to Eligible Investors in
FDI Policy
Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest only under the Government
route in sectors/activities other than defence, space, atomic energy and sector/activities prohibited for
foreign investment
A citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route
A non-resident can invest in India subject to the FDI policy (except in those sectors/activities which are
prohibited like Lottery business, Chit funds, Atomic energy, Railway operations, etc.)

8. Changes in the FDI Policy
The Ministry of Commerce issued Press Note No. 3 (2020 Series), amending Para 3.1.1 (Eligible investors) of the
existing FDI policy as contained in Consolidated FDI Policy, 2017
A non-resident entity can invest in India, subject to FDI policy (except in those sectors/activities which are
prohibited)
However, 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
GOVERNMENT ROUTE
*China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan
Note: It was also stated that not only fresh FDI investments would need government approval, even share
transfers of existing or future investments into beneficial ownership for firms in these 7 countries* will require
Government’s prior approval
Revised Position

9. The Consolidated FDI Policy after Changes –
Eligibility Criteria
Prior to Change Post-Change
Entry Route Any investment by a non-resident person in
permitted sectors (subject to sectoral caps)
shall be through the Automatic Route i.e.
does not require any approval from GoI or
RBI
However, any investment by a person who is
a citizen of or an entity incorporated in
Bangladesh or Pakistan requires prior
Government approval
Any investment by a non-resident person
(except from those countries with whom India
shares land border) in permitted sectors
(subject to sectoral caps) shall be through the
Automatic Route i.e. does not require any
approval from GoI or RBI
Therefore, any investment by a person who is a
citizen of or is an entity incorporated in China,
Myanmar, Afghanistan, Nepal, Bhutan,
Pakistan and Bangladesh would be through
Government Route i.e. would require prior
RBI/Government approval
[The Government route would be for any
investment from the restricted countries
irrespective of the sectors permitted previously
and any threshold limits]

10. Ambiguities of Revised FDI Policy
Though the proactive move taken by the GoI is widely hailed by economy watchers and entities across India, it
is also expected that few clarifications are required for existing investments from restricted countries. Few
instances include the following:
For example, while it is likely that existing FDI would be grandfathered, it is unclear if existing
shareholders from the restricted countries would be permitted to subscribe to a rights issue for
maintaining their pro rata shareholding in a company
Further, the position with respect to investments through SPV* is ambiguous. Clarity is required on
whether “beneficial ownership” of less than 49% in restricted countries would suffice to meet the
requirements for investment or the effective control would also to be remained with persons from
non-restricted countries
Additionally its unclear if investments from Hong Kong would be differently or similarly treated to
investments coming from China (Eg: Rules on establishment of branch or project office treat China
and Hong Kong as different but for certain trade-related guidelines, they are treated the same)
 A SPV also called a Special Purpose Entity is a subsidiary created by a parent company to isolate financial risk
 It may be designed for independent ownership, management and funding and therefore the financials of an
SPV may not appear on the parent company’s balance sheet as equity or debt
*Special Purpose Vehicle (SPV)

11. Probable Effects of the Changes in
FDI Policy

12. Amount of Cumulative FDI held by the
Restricted Countries
Country Cumulative FDI inflows in US $ million
(January 2000 to December 2019)
China 2342.03
Myanmar 8.97
Nepal 3.25
Afghanistan 2.44
Bangladesh 0.08
Pakistan NA
Bhutan NA
• It is to be noted that the People’s Bank of China raised its stake in HDFC Ltd. from 0.8% to 1.01%
during the March quarter
• This move is believed to be the reason for India to act strategically in order to curb acquisitions of
Indian firms who are vulnerable and whose market values have taken a hit due to the outbreak of
COVID-19
• As per the estimation of India-China Economic and Cultural Council, Chinese tech investors have invested
$4 billion in Indian Start-ups
• Also 18 out of India’s 30 unicorns are Chinese funded (Unicorns are start-ups valued over $1 billion)

13. Estimated Value of China’s Investments in
India
Source: Brookings India Report, March 2020

14. Effects of the Revised Position of FDI
Policy
• The prudent and proactive move would ensure that proposals of investment are scrutinized properly
in these trying times
• While the massive economic slowdown has weakened many corporates, this action would curb hostile
takeovers taking the advantage of fall in equity prices
• The measure may augment the potential for “in-house manufacturing” and reduce the foreign
dependencies of India for routine produces
• However, on the downside, the change is expected to have a significant impact on investment by
Chinese players like Alibaba, Tencent and Xiaomi in companies such as Paytm, Ola, Bigbasket, Byju's,
Dream11, MakeMyTrip and Swiggy for follow up funding
• In India, China’s tech giant companies and venture capital funds have become the primary vehicle for
investments in the country – largely in tech start-ups
• The amendment would impact technology and the startup ecosystem in the country if the existing
investors would want to increase their stake in the investee company directly or indirectly convert
existing convertible instruments into equity

15. Overview of Rules in Other
Countries to Guard Against
Strategic Takeovers

16. European Union
On March 25th, 2020, the European Commission issued guidance that warned member states of increased
risk of attempts to acquire healthcare capacities or related industries such as research establishments via FDI
The Commission has asked Member states to make use of its FDI screening mechanisms to
take fully into account the risks to critical health infrastructure, supply of critical inputs and
other critical sectors as envisaged in the EU legal framework
For those Member States that do no have a screening mechanism*, the Commission has
asked to set up a full-fledged screening mechanism and in the meantime to use all other
available options to address cases where the acquisition or control of particular business,
infrastructure or technology that would create a risk
In case a foreign investment does not undergo a national screening process, the Regulation
stipulates that Member States and the Commission may provide comments and opinions
within 15 months after the foreign investment has been completed
*National screening mechanisms are already in force in 14 out of 27 Member States

17. Scope of the EU’s FDI Screening
Regulation
The EU’s FDI Screening Regulation covers foreign direct investments from third countries and applies to all
sectors of the economy and is not subject to any thresholds
The FDI Screening Regulation explicitly refers to risks to critical health infrastructures and supply of critical
inputs amongst the factors to be considered when screening a foreign investment
Member States can intervene in certain cases, outside of screening mechanisms, for instance by imposing
compulsory licences on patented medicines in case of a national emergency such as a pandemic

18. Spain
On March 17th, the Spanish Government enacted a royal decree amending a 2003 law, which makes it
mandatory to obtain prior government authorisation on any FDI proposal
Any FDI would require Government approval for the following
Non-EU investors to acquire 10% or more of, or acquire management rights in or control of, Spanish
companies engaged in sectors such as utilities, data processing or storage, electoral or financial
infrastructure and sensitive facilities and sectors with access to or ability to control sensitive
information
FDI where the investor is directly or indirectly controlled by a government of another country

19. Italy
On April 8th, 2020 - the Italian Government issued Law Decree No.23 of 2020 expanding the strategic sectors
governed by the “Golden Power” law on the review of Foreign Investments in Italian assets
Up to December 31st, 2020, the following measures will apply
• Screening of acquisitions of controlling interests by EU Entities now applies to all sectors as expanded by the
decree (discussed in next slide)
• Prior to force of the Decree such screening applied to EU Entities only if the acquisition related to defence and
national security sectors
Screening of the acquisition by any non-EU entity of any interest representing at least 10% of the corporate
capital or otherwise entitling to at least 10% of the voting rights, as well as any subsequent acquisition exceeding
15%, 20%, 25% and 50%, in each case of any company operating in any of the strategic sectors and so long as the
investment value exceeds Euro 1 million

20. Sectors falling under the Golden Power
Law
Sectors falling under the Golden Power Law before
the decree
Sectors falling under the Golden Power Law after the decree
Activities of strategic importance for the defence and
national security
Same
Networks and plants, assets and relationships of
strategic importance to the energy, transportation
and communications sector
Expanded further to include, in addition:
1) Any critical infrastructure including energy, transport,
water, health, communications, media, data processing or
storage, aerospace, defence, electrical or financial
infrastructure, and sensitive facilities, as well as land and
real estate crucial for the use of such infrastructure
2) Supply of critical inputs, including energy or raw materials
Broadband electronic communications services
based on 5G technology
Same
Other Sectors falling under the Golden Power Law after the decree
Critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cybersecurity,
aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and
biotechnologies
Food security
Access to sensitive information, including personal data, or the ability to control such information
Freedom and pluralism of the media
Financial, credit and insurance

21. Australia
The Australian Government made an announcement on March 29th, 2020 that all monetary
threshold amounts for foreign investments subject to the Australian Foreign Acquisitions and
Takeovers Act are now temporarily $NIL in all asset classes
Any proposed investment by a foreign person in developed commercial land, mining and
production tenements and agricultural land now requires Foreign Investment Review Board
(FIRB) approval, regardless of the value of the investment
The acquisition of a substantial interest in an Australian entity or Australian business
(including agribusinesses) also now requires FIRB approval regardless of value
The regulatory decision period to consider relevant FIRB applications will now be extended to six
months from the date of payment of the FIRB application fee up from the current 30 day decision
period

22. Canada
On April 18th, 2020, the Government of Canada announced that the Government will subject certain
foreign investments to enhanced scrutiny under the Investment Canada Act (ICA)
While each investment will continue to be examined on its own merits, the Government will
scrutinize with particular attention under the Act, FDIs of any value, controlling or non-
controlling, in Canadian businesses that are related to public health or involved in the supply of
critical goods and services to Canadians or to the Government
The Government will also subject all foreign investments by state-owned investors, regardless
of their value, or private investors assessed as being closely tied to or subject to direction from
foreign governments, to enhanced scrutiny under the Act
Enhanced security may involve the Minister requesting additional information or extensions of
timelines for review as authorized by the ICA

23. WTO’s Principles and Inference

24. WTO’s Principles on Foreign Investment
The revision in FDI policy by the GoI raised objections from China stating that the additional barriers set by India
for investors from specific countries violate WTO’s principle of non-discrimination and go against the general
trend of liberalization and facilitation of trade and investment
WTO’s Principles and Inference
• The WTO's founding and guiding principles stress upon open borders, principles of liberalization, the
guarantee of most-favoured nation principle, and non-discriminatory treatment by and among
members, and a commitment to transparency in the conduct of its activities
• The Most-favoured Nation (MFN) principle implies that all countries under the WTO agreements
should be treated equally i.e. countries cannot normally discriminate between their trading partners
• Although, Regional Trade Agreements (RTAs) provide for reciprocal preferential trade agreements
between two or more partners, which form part of exemption to Non-discrimination and are
authorized under the WTO (Eg: The Enabling Clause of WTO Agreement provides for preferential trade
agreements for trade in goods amongst developing country Members) [At present, India has 16 RTAs
with WTO member countries]
• Changes in Indian FDI policy is unilateral and thus it cannot be referred as a RTA with its land border
countries
• However, the changes can also not be considered discriminatory because they are only a form of
protectionism initiated to examine the implications of the investment and not complete prohibition of
open trade

25. What makes India’s FDI Policy different from
Other Countries ?
The European Commission in its Communication of the FDI Screening Regulation stated that the stringent
measures should not be construed as complete restriction of free capital movements because the Treaty of
Functioning of European Union (TFEU) provides for such restrictions on permissible grounds of justification in
order to attain legitimate public policy objectives
The changes made by the GoI forms part of a wider global movement towards state interventionism and
national protectionism
However, while other countries’ changes in its investment policies insisted widely on screening investments
from any foreign country in specific sectors, India’s move is strategically targeted against investments from
few countries with whom it shares land border
Although, it is to be understood that the entire scope of investment is not restricted. Rather the measures
are only a filter to have an oversight to examine the implications of the investment in order to avoid
takeovers of vulnerable companies given the present volatile situation

26. Way Forward
In the last few years, some of the most influential economies have reformed their foreign investment
review frameworks to allow the government more leeway to block deals or impose conditions on
their completion
This trend towards increased scrutiny of foreign investment has been primarily focused on
addressing national security concerns and now triggered by COVID-19
While most cross-border transactions have a high likelihood of being approved, those in
strategic sectors may encounter more scrutiny and face a prolonged approval process at this
highly sensitive and uncertain time
Hence, India’s pre-emptive decision placing a clamp on movement of capital is well within the ambit
of protecting the economy during times of obscurity

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