19/06/20

ASIA: Border escalation puts a big question mark on foreign investment inflows.

As published on livemint.com, Thursday 18 June, 2020.

MUMBAI : Mounting border tensions with China may impact a widely expected government clarification on Chinese foreign direct investment ( FDI) into India on beneficial ownership of the investment firm. The clarifications was expected two weeks ago, but was deferred due to the escalation of border tensions, said two people aware of the development, requesting anonymity. This has left investors in the startup ecosystem and India’s greenfield projects wary.

On 22 April, the Centre had issued a notice under the Foreign Exchange Management Act (Fema), saying investments originating from seven neighbouring countries, including China, must seek prior approval of the government. The wording of the notification would have rendered a Chinese investor holding a single share in the investing entity as to qualify as ‘beneficial owner’.

After several representations from the industry, seeking clarity on ‘beneficial ownership’, the Centre was considering the definition under the Companies Act 2013 of 10% shareholding in a company for beneficial ownership, Mint reported on 11 May. “The steadily increasing border escalation has forced the government to put the clarifications on the back burner," said a government official.

“Following on from the amendment to the FDI rules, industry players and bodies had written to the government and there was a clarification expected, especially on the meaning of beneficial ownership, but it is delayed. While businesses will continue to have an independent pedestal so long as it is not pierced with external factors, national security and sovereignty are extremely important aspects which must be maintained," said Dipti Lavya Swain, cross border corporate, and mergers and acquisitions lawyer.

This delay is resulting in an increasing pile of applications as government departments are not in a hurry to clear them. “The initial indication given from the regulators was that applications despite the added layer of approval would be cleared in a maximum 4-6 weeks. Which has not been the case. One distressed financial services, which was set to be acquired by a Hong Kong-based fund is stuck; an automobile major from China was looking to invest in a greenfield project is also stuck," said the second person.

“Fresh rounds of investments by Chinese investors, such as Tencent Holdings Ltd and Alibaba Group Holdings Ltd are facing longer timelines for getting approvals. Another concern is regulators are taking adverse view on Hong Kong and Taiwan, which are technically not a part of mainland China," he added.

Out of India’s 30 unicorns, 18, including Paytm, Ola, BigBasket, Byju’s, MakeMyTrip, Zomato and Swiggy, are Chinese-funded.

“We were hoping that government would clarify the rules around beneficial ownership for FDI coming in from Indian land neighbours including China. Ideally these investments would be considered by the government on case-to-case basis but our Chinese clients/ investors are now adopting a wait and watch approach due to lack of clarity and emerging geopolitical situations," said Atul Pandey, Khaitan and Co.