Several foreign investors will likely come under the purview of the government’s recent foreign direct investment (FDI) policy changes to curb opportunistic takeover of Indian companies during the ongoing COVID-19 crisis. While the communication came through a press note and requires further clarity on the scope of its impact, the investor community is faced with several questions regarding its unintended consequences.

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A mention of “beneficial ownership” may mean that any firm with Chinese investors at any level falls in this category. The press note by the government also does not specify a threshold so prima facie even the purchase of a solitary share comes under the scrutiny.

No distinction has been made between minority control and passive investment so the note’s reach appears all encompassing. Further, the government has also not specified if the change applies to specific sectors, so it brings all sectors under its purview.

Also read: New FDI rules to hit Indian unicorns, other startups running on Chinese capital

As it stands, any Chinese investor buying even a single share in an Indian company through the FDI route would appear to need the Indian government’s approval.

Dinesh Kanabar of Dhruva Advisors said: “It says residents as opposed to citizens and with the introduction of beneficial ownership goes down to the shareholder.”

He added: “Hong Kong-based investors in my view are covered and what happens to many Indians based in Hong Kong?” Any entity with ultimate investor from China is likely to be covered.

Private equity investors are worried that if all Chinese beneficiaries are covered due to their Chinese LPs all their investments may fall prey to the rule change and require additional government approval. Time consuming nature and uncertainty around these approvals could impact the investment climate, an expert pointed out.

Karthick Maheshwari, partner at Khaitan & Co, said: “In venture capital ecosystem very quick Chinese investments at good valuations were possible in startups and even the time period for those investments was also compressed compared to others so it will be impacted.”

Startup world is worried with large Chinese groups like Alibaba and Tencent invested in most of the big Indian unicorns. Karthick pointed out, “This may also lead to ‘limited grandfathering’ which may require government approval for further investments by Chinese investments in their existing portfolio companies.”

Niti Aayog CEO Amitabh Kant told CNBC-TV18, “The intention

Also read: India's new FDI rules may open new flashpoint with China

If the government intends to stop the hostile takeover of the companies then just a change in FDI policy is not enough. Foreign portfolio investors (FPIs) need to be covered in the same way from the stock market perspective.

Kunaal Shah, partner at Trilegal said: “This circular by itself does not have any impact on listed securities. Perhaps Sebi

While the new FDI norm has rattled the investor community, most are of the view that the detailed guidelines and the Foreign Exchange Management Act (FEMA) amendments once notified will give clarity on the scope of the changes and their impact on investment sentiment.

First Published:Apr 20, 2020 7:01 PM IST