New rules cover foreign indirect investment as well

New Delhi: The government’s move to screen foreign direct investment (FDI) from China will also cover overseas transactions in other nations that involve the country.

For instance, if a Chinese company invests in an entity overseas that has in turn invested in India, this will need to be approved as per the government press note issued on Saturday.

The measure is wide enough to apply to additional investment in existing ventures or wholly owned subsidiaries of multinationals. It will cover cases in which the direct investor may be from a country not covered but the ultimate investor is from China.

The Indian entity receiving the investment will have to report and seek approval for such investments executed overseas or indirect investments where the beneficial ownership is in the seven countries covered under the notification – China, Nepal, Pakistan, Bhutan, Bangladesh, Myanmar and Afghanistan.


Multi-layered Transactions

“If a company that has invested here sees any Chinese investment overseas in an entity that has indirectly invested in India, (it) will need to take approval,” said a government official.

The guideline will also be applicable to multi-layered transactions where there is Chinese investment at any level.

Private equity investors and venture capital funds that have investments from China will also need prior approval before they make any investment, even ones that have already been pledged.

The new rule announced on Saturday via Press Note 3 of 2021 has made prior government clearance mandatory for any investment coming from countries that share a land border with India even if it’s in sectors that are on the automatic route.

“In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/ purview,” it said.

“The underlying idea to cover the beneficial ownership, under the said guidelines, is to ensure that both direct and indirect investments are covered and go through the regulatory scrutiny,” said Vikas Vasal, national leader, tax, Grant Thornton in India. This will ensure that the intent of the regulation is not circumvented through multi-layered structures, such as routing it through a country not covered, he said.

Further clarification is required on the reporting mechanism and identification of beneficial ownership structures such as the percentage of holding to ensure full compliance with the rules in both letter and spirit, Vasal said.

“This move of the government is in line and consonance with the global sentiments and concerns raised globally on possible acquisition/ takeover attempt by Chinese companies,” said Rakesh Nangia, chairman, Nangia Andersen Consulting. “Similar steps have been taken by a few other counties also.”

Nangia said the Indian government has not prohibited such investments but only seeks to regulate them, directly or indirectly.

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