Previously, the FDI regime in India provided for preliminary approval of regulators in multiple sectors. However, after implementation of certain legislative amendments, the requirement only applies to FDI in certain strategically important sectors of the country’s economy. There’s exceptions that require FDI from the Islamic Republic of Pakistan & the People's Republic of Bangladesh to get approval of the Indian government. However, the rapid spread of the coronavirus pandemic & growing tensions with the PRC have caused the Indian government to announce changes in the regulation of FDI in India.
What Does It Mean?
Now, preliminary permission for conducting investment activities in the Republic of India is required if investments come from legal entities:
- located in neighboring states;
- in which beneficial owners are located in neighboring countries.
This requirement also applies to a transfer of FDI in India-registered enterprises undertaken for a second time.
Because FDI from India’s other neighbors is regulated or insignificant, this requirement primarily applies to FDI from the PRC. It’s believed that the reason for its introduction is an increase in the PRC's stake in HDFC, the biggest privately-owned bank in the Republic of India.
A statement made after the introduction of the requirement said that its main goal was to "deter accidental M&A of Indian enterprises." Nevertheless, the requirement’s scope is quite extensive & even covers the purchasing of a minority stake & financing of wholly owned enterprises in the Republic of India.
Updated FDI Legislation
Those wishing to purchase a company in the Republic of India should keep in mind that the “beneficial owner” term doesn’t yet have a definition. And this alone creates a lot of confusion & uncertainty. They’re considering introducing a for it; however, the issue remains unregulated as of now. Possibly, this has something to do with the fact that most major enterprises in the PRC are structured in such a way that their umbrella companies are located outside mainland China. Hence, providing an all-encompassing definition may well prove to be a challenge.
Those planning to start a business in the Republic of India should keep in mind that the requirement could affect India's technology sector - one that has been very successful in attracting FDI.
Looking to acquire an Indian company? Need advice on investment regulation in India? Why not reach out to IQ Decision UK?