Government of India today has released a press note restricting FDI investments under the automatic route by countries which share their border with India, and all such investments shall have to be made under Government approval route only. Considering that the framework already provided conditions with respect to foreign investment from Pakistan, Bangladesh, Nepal etc., the new restriction seems to be directly focused on investments from China.

News reports suggest that the Indian Council of Investors made a representation to Ministry of Finance to impose restriction on investments by China into India. Reports also suggest that Securities Exchange Board of India (SEBI) has been tracking inflow of investment from China into Indian stock markets. These seems to be in sync with the approach that few other countries are currently taking with respect to investments from China.

Our immediate reaction on the impact of the revised position:

1. Existing transactions (including joint ventures) where the commercials were already finalised or agreed to and only funding was pending will get delayed. Similar would be the impact on deals with multiple closings where all closing had not been completed. Hopefully the approval route would not be a major obstacle for such closings and the Government will be considerate and efficient with dealing with such applications, since these deals were structured / agreed to pre-Covid 19.

2. Conversion of external commercial borrowings (ECB) into equity will also be impacted since such conversions fall within FDI transactions.

3. A wide net has been caused by imposing direct and indirect restriction by including the following language ‘where the beneficial owner of an investment into India is situated in or is a citizen of any such country’. Not only does this cover downstream investments by Indian entities who parent is situated in the restricted nations, in the absence of any guiding principle, the language should be interpreted widely and could result into unintended ripples. The fact that the notification also looks to cover subsequent changes in beneficial ownership, it will be another challenge for the regulatory to decipher and implement.
4. Considering that the press note is limited to FDI investments and FPI investments are not included therein, FPIs based out of our neighbouring countries should be allowed to continue to invest in India.

We await the corresponding RBI notification to analyse if any clarity/details originate form it.