New FDI rules trigger concerns over investments from Taiwan

Mumbai: India’s move to scan foreign direct investment (FDI) from China has left a trail of questions. Will New Delhi screen investments from Taiwan? India doesn’t recognise the sovereign status of Taiwan while Chinese leadership continues to claim sovereignty over the East Asian state. Will Chinese inflow in a rights […]

Mumbai: India’s move to scan foreign direct investment (FDI) from China has left a trail of questions.

Will New Delhi screen investments from Taiwan? India doesn’t recognise the sovereign status of Taiwan while Chinese leadership continues to claim sovereignty over the East Asian state. Will Chinese inflow in a rights equity issue by an Indian company come under scrutiny? What about an existing Chinese investor infusing capital when the Indian partner is unable to chip in funds? A week after the new FDI rules, many Indian firms are looking for clues to these queries. “Given Taiwan’s unique political position, one cannot completely rule out concerns around the possibility of the restrictions being applicable to it as well,” said Moin Ladha, partner at the law firm Khaitan & Co.

British bank HSBC, which was established in Hong Kong and has operations in mainland China, is understood to have sought legal opinion on whether the Indian government’s recent directive on FDI covers Taiwan. Some other MNC banks which offer custodial services and offer fund flow of foreign investors may approach the Reserve Bank of India (RBI) for clarity.

Industry Lobbies Ask for FAQs

An HSBC spokesman declined to comment on the subject.

“Though not formally clarified yet, it is expected that the government may also cover under the Press Note investments from Special Administrative Regions of China such as Hong Kong and Macau owing to China’s control and influence in such regions though they do not share land borders with India,” said Anshuman Mozumdar, partner, L&L Partners, Mumbai.

This is also supported by recent reports of Securities and Exchange Board of India (Sebi) seeking particulars of beneficial owners of foreign portfolio investors (FPIs) located in such jurisdictions and countries like Taiwan, said Mozumdar.

PRIOR GOVT APPROVAL

According to the recent government notification, all overseas investments from countries sharing border with India would need a prior approval from the government. Even though Taiwan has a tax treaty with India and doesn’t share a border with India, strategic as well as fund beneficial owners from Taiwan are looking for clarity on FDI rules.

Industry lobbies and consultants have asked the government to come out with FAQs on the FDI rules. More so because the power to regulate non-debt instruments (like equity or FDI as against ECB or foreign loans) has shifted from RBI to the government since 2019.

“Chinese investors or investors linked to China are spread across various companies, portfolio funds and even pooled vehicles like Alternative Investment funds (AIFs). Are AIF’s inflows to be monitored, though technically they should not be. Will existing Chinese investors participating in a new round of capital raising exercise or in a rights issue have to undergo the same approval process like a new investor? What about indirect transfers — say an US company holding a sizeable stake in an Indian entity is acquired by a group from China or Hong Kong or Taiwan?” asked an advisor to one of the industry associations.

In recent years, there have been investments from Taiwan in sectors such as infrastructure and energy. According to the person, the industry is also waiting to find out whether China-linked investments in sectors like technology and ecommerce would be treated differently.

RENOUNCING RIGHTS

Close on the heels of the new FDI rules — which followed restrictions imposed by other countries like Australia and Germany — India this week tightened the pricing rule for offshore investors buying stocks renounced by an India shareholder in a rights offering.

Since the pricing of a rights issue is freely decided by a company and can be well below the price applicable in a preferential issue or a regular FDI, the regulation was sometimes misused by foreign investors and private equity houses.

Promoters or a large shareholder would cut a deal with a foreign investor by renouncing the rights shares in favour of the offshore investor. Since this price in all likelihood would be lower than the one arrived under Sebi rules or Foreign Exchange Management Act, it would turn out to be a cheaper route for a foreign investor buying into a local company.

Source Article

Lois C. Ferrara

Next Post

aarogya setu app: Government makes Aarogya Setu app a must for its employees

Thu Apr 30 , 2020
NEW DELHI: The Centre has made the use of Aarogya Setu mobile application compulsory for its employees and, according to senior officials, wide use of the app by people in general is necessary if the country has to successfully step out of the lockdown in phases starting May. A government […]

Tags

TL