On April 17, 2020, India announced a change to its foreign investment policy under which investments by “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” will need prior regulatory approval. The policy is not yet law. The Reserve Bank of India is expected to issue additional regulations before the rule goes into effect.
Since there is an existing rule that already applies to investments from Pakistan and Bangladesh, this latest change appears aimed squarely at regulating investments from China.
A few matters to note:
- The stated intention is to curb “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic,” but it applies to all sectors and to both control transactions and minority investments.
- The reference to “beneficial owner” (not defined) makes this relevant to global acquisitions by Chinese investors of businesses which have India subsidiaries.
- The policy does not apply retrospectively, but will be relevant to any equity funding going forward, including by a Chinese parent capitalizing existing subsidiaries and other follow-on investments (e.g., pre-emptive rights).
- The time period for processing applications for foreign investment approval is typically 8-10 weeks, and depends on the relevant ministry processing the application.
The policy raises several questions, including whether the following scenarios trip the requirement to seek regulatory approval:
- Since many China-based companies are structured with offshore holding companies, a direct or indirect investment by such an offshore holding company of a China-based company
- Chinese beneficial ownership (i.e., limited partners) in an investment fund managed by third party fund managers outside China
- Investments from Hong Kong and Taiwan (the Reserve Bank of India currently tracks investment inflows from these regions separately from investments from “China”)
The policy is not yet law and will take effect once the corresponding regulations are notified. We are monitoring these developments and are hopeful the issues mentioned above will be clarified.
Goodwin Procter LLP and its affiliates do not practice Indian law. The information contained in this publication is based upon the current understanding of Goodwin Procter lawyers active in the firm’s India practice.
Yash A. RanaPartnerCo-Chair, Private Equity