Govt Mulls Easing Rules for Border Nation FDI, 26% FDI from China may be Allowed

India is considering a plan to allow up to 26% foreign direct investment (FDI) from countries with which it shares a land border, including China and Hong Kong, without government scrutiny in sectors that are on the automatic route. An inter-ministerial panel of secretaries is discussing various options and a decision is expected soon, government officials said.

The decision would expedite more than 100 proposals that are stuck after the FDI policy was amended in April, making government approval mandatory for foreign investment from border nations. The inter-ministerial panel is headed by the home secretary.

The actual threshold may even be set at the prescribed 25% beneficial ownership limit in the Prevention of Money Laundering Act (PMLA), which will deny such investors the power to block special resolution powers under the companies law.

Government Contracts

“Suggestions are that up to 26% should be allowed for some sectors,” said one of the officials.

“Various options and issues coming up after the press note 3 was issued have been examined and discussed in detail,” said another, adding that a final call will be taken soon.

For government contracts, a threshold of 25% has been prescribed for beneficial ownership. Separate treatment for brownfield and greenfield investments could be spelt out in the proposed framework, the second official said. A suitable clarification will be issued once the decision is finalised, the first official said, adding that security clearance will still be required for such investments as is the case for investments in certain sensitive sectors.

Some of the proposals stuck over clearances are from American or European companies that have marginal investments from Hong Kong or China-based entities or individuals. Hence, while the move was largely aimed at curbing direct and indirect Chinese FDI owing to growing security concerns, it has impacted entities and investment from other countries as well. There is a growing view among policymakers that the norms could constrain ease of doing business as India seeks to attract foreign investors.

The April 18 press note issued by the Department for Promotion of Industry and Internal Trade (DPIIT) said the FDI framework was aimed at “curbing opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic”. The changes meant that any foreign direct investment from Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan and Afghanistan needed prior government approval. This was irrespective of the sectoral cap and applied to all sectors on the automatic route.

Prior government approval was made mandatory even for indirect FDI from these countries routed via others. Approval is required even if the beneficial owner of an entity investing in India is situated in – or is a citizen of – any of these countries and there are subsequent changes in beneficial ownership by way of direct or indirect transfers.