Prior Government Approval in case of Foreign Direct Investment by Chinese Companies in India

Department for promotion of Industry and Internal Trade through Press Note 3 (2020) dated April 17th, 2020 announced new policy for foreign direct investment (FDI) from China. As per new policy all investment from China will now require prior approval of the Indian Government, and this approval requirement also applies to transactions, where the beneficial owner of the investment, (whether directly or indirectly) is from China.

What Impact it will have on Chinese Companies planning to invest in India        

Before introduction of this policy, Chinese companies were not required to take any approval from government except for some sectors. So, there were able to start business in India after incorporating company in India which generally took 2 to 4 weeks. At present, the time period for processing of FDI applications for government approval ranges between 8 to 10 weeks. Further investment from China is also subject to security clearance by Ministry of Home Affairs (MHA) for investment in sensitive sectors can result into additional 1 to 2 weeks. Considering new policy, now Chinese companies will take 10 to 14 weeks to start business in India after obtaining government approval

Whether new policy will apply to Hong Kong or not

Investments from China including if beneficial owner of the investment, (whether directly or indirectly) is from China are now subject to government approval. However, press note is not clear about investments from Hong Kong whether prior approval of the government will be required for any investments from Hong Kong (or where the beneficial owners are from Hong Kong) remains to be seen.

Treatment of existing investments by Chinese Companies

This policy does not apply to existing investment by Chinese companies in India including in their wholly owned Subsidiary company. Chinese companies would not be required to go through process of government approval for existing investments This policy applies only on going forward basis.

Whether government approval will be required for further infusion of fund

Our interpretation of press note suggests that infusion of fund by Chinese parents into Indian subsidiary either through right issue or otherwise will require government approval. However, we have to wait for notification of Foreign Exchange Management (FEMA) to issue guidelines covering this new framework of FDI by Chinese Companies in India.

Whether government approval will be required in case of transfer of shares from Chinese company to another Chinese Company within same group

Our interpretation of press note suggests that transfer of shares by Chinese company to their group company or otherwise will require government approval. However, we have to wait for notification of FEMA to issue guidelines covering this new framework of FDI by Chinese Companies in India

Whether government approval will be required in case of transfer of shares by Chinese company to Indian company

Our interpretation of press note suggests in case of transfer of shares by Chinese company to Indian company will not require government approval

SW’s View on Way Forward

We have to wait for FEMA notification to understand framework of new policy in terms of government approval process, sectors which are going to be covered for the purpose of approvals. Whether all sectors will require government approval or only sensitive sectors will require government approval need to be seen. We hope government should clarify sectors which need approval otherwise covering all sectors will have impact on Indian Businesses who are planning to raise money from China or planning to enter into joint venture including made in India initiative of Prime Minister Modi.

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