FDI policy revised to ward off Opportunistic takeover of Indian firms amid COVID-19 pandemic

With an aim is to curb the opportunistic takeover of Indian companies whose valuations have come down due to the coronavirus pandemic, the government has made its nod compulsory for all foreign direct investment coming from neighbouring countries including China.

The new rules mark a major change in the foreign direct policy of the country and they will also apply to transfer of ownership of FDI.

The stricter measures have been taken to avoid the opportunistic takeover of Indian companies as their valuations have plummeted post the COVID-19 pandemic.

Last week concerns were raised when HDFC had declared that China's central bank PBOC now owns more than 1 per cent of Indian lender's stake.

China's central bank had gradually raised stake in Indian lender from 0.8% to 1.1 per cent. The department for the promotion of industry and internal trade has said through press note that an entity of a country which shares a land border with India can invest only after receiving government approval.

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.

This means investments from China would also be evaluated on a case-to-case basis. At a time the entire world is battling coronavirus crisis China is investing in and acquiring companies all over the world.

Chinese investment was so far allowed under the automatic route except for the sensitive areas like telecom, defence and national security etc.

Chinese companies currently own stakes in several Indian start-ups. While Tencent has around 5% stake in Flipkart, Alibaba owns a significant stake in Paytm. Also, Chinese firms who want to exit their existing investments from Indian firms will now have to require the government’s approval.