Terms Relaxed For Chinese Investment, But India Wary About Security

'It's a changing world and the opening up doesn't mean that concerns with regards to security have gone away.'

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Key Points

India will allow global investors with up to 10 per cent Chinese shareholding to invest through the automatic route.
Firms directly based in China, Hong Kong, or other land-border nations will still require prior government approval for investments.
The Cabinet amended Press Note 3 to permit non-controlling Chinese stakes up to 10 per cent in non-border country entities.
Select strategic sectors including battery components, rare earth magnets and electronic components will see faster investment proposal approvals.
Despite faster processing timelines, government officials confirmed security and political clearance norms for sensitive investments will remain unchanged.

10 per cent Chinese Stake Allowed in FDI

Global investors having Chinese shareholding of up to 10 per cent will be eligible to invest in India under the automatic route, across sectors.

But this would depend on sectoral caps, according to changes approved under the foreign direct investment (FDI) policy, government officials said on Wednesday.

Press Note 3 Investment Rules Explained

Earlier, foreign firms with shareholders from China or land-border nations owning even a single share had to seek mandatory approval to invest in any sector in India under the Press Note 3 of the FDI policy.

However, entities registered in China and Hong Kong and countries sharing land borders with India, will continue to need prior government approval in case they want to invest in India.

Cabinet Eases Land-Border Investment Norms

"All the restrictions for investors from land-bordering countries (LBCs) are still applicable. There is no relaxation so far as entities or investors in LBCs are concerned," Department for Promotion of Industry and Internal Trade (DPIIT) Joint Secretary Jai Prakash Shivahare said.

"This relaxation is only for entities in non-LBCs and having beneficial owners from LBCs below 10 per cent and non-controlling stake... there are no relaxations as far as investments from LBCs are concerned," Shivahare added.

If a firm from a country sharing land border with India provides technology and holds even one per cent stake, through which it may exercise some form of control, the investment will still need approval through the government route, Shivahare explained.

Shivahare's statement came a day after the Union Cabinet adopted a calibrated approach of easing restrictions on investments from countries sharing land borders with India, including China.

It made two amendments -- allowed investors from China and other land-border countries holding up to 10 per cent non-controlling stakes under 'automatic-route' and introduced a definitive timeline for processing investment proposals in select sectors to boost domestic manufacturing.

The Press Note 3 restrictions to cases where land-border country investors have only non-strategic, non-controlling interest was seen as adversely affecting flows from investors, including private equity (PE) and venture capital (VC) funds.

DPIIT Secretary Amardeep Singh Bhatia said that large global firms such as BlackRock, Carlyle were seeking the easing of the press note.

Press Note 3, notified on April 17, 2020, amended the FDI policy, which mandated prior government approval for investments from an entity of a country, which shares 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.

India's position was revised for 'curbing opportunistic takeovers/acquisitions' of domestic firms, considering their financial stress due to Covid.

Rare Earth, Battery Sector Fast Track

The move was mainly targeted to restrict investments from China, amid tensions at the border.

Before 17 April, 2020, investments from China could proceed without any prior government approval -- also known as the automatic route.

Proposals for investments from China and other land-border countries will include advanced battery components, rare earth permanent magnets, rare earth processing sectors and such applications will be processed and decided within 60 days.

Bhatia told reporters that this list can be expanded or reduced by a committee of secretaries headed by the Cabinet Secretary.

The list also includes sectors like capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer.

Security Clearance Rules Remain Strict

However, he clarified that despite the expedited mechanism being laid out by the government and a definitive 60-day timeline for processing investment proposals, the security and political clearance will not be eased.

"It's a changing world and the opening up doesn't mean that concerns with regards to security have gone away," Bhatia said.

At present, about 600 applications are under Press Note 3.

The amendments will come into effect after DPIIT and the finance ministry notify it.

Feature Presentation: Ashish Narsale/Rediff