India relaxes FDI rules for China and neighbouring countries

The Government on Tuesday eased foreign direct investment (FDI) norms for China and other countries sharing land borders with India by allowing overseas firms having up to 10 per cent shareholder from these nations to invest in the country without mandatory approval. Earlier, overseas firms with shareholders from these nations owning even a single share had to seek mandatory approval to invest in India in any sector.

However, other conditions of FDI norms, including sectoral caps and entry routes, will be applicable to these investments.

Also, these investments will be subject to prior reporting of information to the DPIIT (Department for Promotion of Industry and Internal Trade). The Government has amended the press note 3 of 2020 in this regard. The decision was taken in a meeting of the Union Cabinet chaired by Prime Minister Narendra Modi. The amendment in the press note provides for a definition and criteria for the determination of ‘Beneficial Ownership’ that is widely used by the investing community, under the Prevention of Money Laundering Rules, 2003.

The beneficial ownership test will be applied at the level of the investor entity. “Investors with non-controlling land border countries (LBC), beneficial ownership of up to 10 per cent shall be permitted under the automatic route as per the applicable sectoral caps, entry routes, attendant conditions,” the Government said in a statement.

The Government has also decided on expeditious clearance of investment proposals from LBCs in specific sectors.  Under this, proposals for LBC investments in specified sectors/activities of manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer or any other sector/activity added by the committee of secretaries headed by the Cabinet Secretary will be processed and decided within 60 days. In these cases, the majority shareholding and control of the investee entity will be with a resident Indian citizen and/or resident Indian entity owned and controlled by a resident Indian citizen at all times.

Following that, an entity of a country which shares a 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 after getting permission from the Government.

Additionally, any transfer of ownership of any existing or future FDI in an entity in India resulting in the beneficial ownership falling within these jurisdictions also requires Government approval. This rule was seen as adversely affecting investment flows from investors, including global funds such as private equity/ venture capital funds.