Screening Chinese investments: What happens next?

By Santosh Pai and Anuj Trivedi, Link Legal India Law Services

Entities affected by India’s new policy may be able to take measures to obtain fast-tracked approvals

During the first quarter of 2020, the People’s Bank of China made several purchases of shares in HDFC, India’s largest mortgage provider. When its total shareholding exceeded 1%, the news was made public due to disclosure requirements of the stock exchange.

Santosh Pai
Link Legal India Law Services

Amid the COVID-19 pandemic, when most listed stocks were trading at historic lows, this news caused a sensation among Indian policymakers and the public alike. A few days later, on 17 April, the Department for Promotion of Industry and Internal Trade (DPIIT), within India’s Ministry of Commerce, issued press note No. 3 (PN3) with a stated view of curbing “opportunistic takeovers/acquisitions of Indian companies”.

It made government approvals mandatory for investments from countries that share a 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. Since similar approvals were already required for Pakistan and Bangladesh, and remaining neighbours of India like Afghanistan, Bhutan, Nepal and Myanmar are not significant foreign investors, it was clear that the move was primarily targeted at investors from China.

Anuj Trivedi
Link Legal India Law Services

Further, any subsequent changes in beneficial ownership, either through direct transfer or otherwise, of any existing or future foreign direct investment (FDI) would result in such beneficial ownership falling within the purview of the above-mentioned restriction, and being put under the government approval route.

The consequential amendments to the Foreign Exchange Management (non-debt instruments) Rules, 2019, incorporating the changes introduced under PN3, were notified on 22 April 2020 (Foreign Exchange Management Act [FEMA] amendments).

The decision to subject Chinese investments to government approvals has triggered debate around the possible reasons behind such a decision, and its potential impact on different types of investments. Although there might be political and security aspects to this decision, the focus of this article will be on its legal implications: (1) who will be considered as “Chinese” investors?; and (2) what steps will Chinese investors need to undertake to obtain government approvals?

The new rule does not distinguish between greenfield and brownfield investments, or between types of investors, such as industry players, financial institutions, or venture capital funds. Hence, the “beneficial ownership” test employed under the Companies Act, 2013 assumes significance.

Under section 89(10), this definition includes interests held “directly or indirectly”, whether “through a contract, arrangement or otherwise”, as a “right or entitlement” of a person acting “alone or together with any other person” in relation to a share.

Further, section 90 of the act defines a significant beneficial owner as an individual who: (1) holds not less than 10% of shares, voting rights or dividends; or (2) exercises, or has the right to exercise, “control” or “significant influence” over a company. This means the mere presence of an investment holding structure with multiple layers will not be enough to avoid government approval.

In addition, Hong Kong, from where a bulk of Chinese investments currently flow, is likely to be considered as part of China for the purposes of the new rule. While the application of this rule is relatively simple for traditional industry players and business groups, it gets more complicated when applied to entities such as venture capital funds, which are often registered in tax havens, and have multiple investors from various nationalities. For instance, the presence of limited partners with a Chinese nationality in a fund could trigger the requirement of a government approval.

An investor who requires government approval for a proposed investment is required to complete and submit an online application at the website of the Foreign Investment Facilitation Portal. This is the same procedure that was established in May 2017, when the Indian government took a decision to abolish the Foreign Investment Promotion Board and the authority to grant government approvals for foreign investment under the Foreign Direct Investment Policy and the FEMA Regulations was entrusted to the concerned administrative ministries or department.

The standard operating procedure for this entails provision of information related to the investor, proposed investment, investee, investee’s direct and downstream activities, if any, the shareholding pattern, and a list of supporting documents. In case such an application is submitted using a digital signature certificate of the authorised signatory, then physical submission of such an application is not required.

The timeline for such approvals before PN3 was issued ranged between four and six weeks, since they involved “sensitive” sectors such as telecoms, broadcasting, defence, civil aviation and mining.

Although the procedure for government approval might remain the same under the new rule, it is possible that approvals for certain categories of investment will be fast-tracked. The most obvious category will be greenfield investments in non-sensitive sectors, where India requires large-scale capital, employment generation and technology.

Similarly, initial and follow-on investments in subsidiaries of Chinese companies, where there is no change of control, might also be treated with preference. Venture capital funds might need to explore alternate investment structures.

The current possibilities include obtaining a registration under the SEBI (Foreign Venture Capital Investors) Regulations, 2000, or setting up a domestic fund in the form of an alternative investment fund. Both structures will obviate the need to obtain government approval for each individual investment.

Moving forward, the best possible scenario is that the requirement for Chinese investors to obtain government approval will become a mere formality, and fast-track approvals will be granted as a matter of course in a large percentage of applications. This will enable the Indian government to collect relevant information on activities of Chinese investors without causing any substantial impact on the timeline for such investments.

If it turns out that this was the original intention behind PN3, rather than short concerns over opportunistic acquisitions, then the “new normal” for Chinese investors might extend well beyond the current circumstances triggered by the COVID-19 pandemic.

Santosh Pai is a partner at Link Legal India Law Services. He can be contacted on +91 9004 2652 35 or by email at

Anuj Trivedi is a partner at Link Legal India Law Services. He can be contacted on +91 9971 9920 92 or by email at

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