FDI with Even the Smallest Chinese Holding will Need Govt Nod

NEW DELHI: Foreign direct investment (FDI) proposals with even minuscule Chinese holding will need government approval, with the Centre abandoning its earlier plan to set a floor for “significant beneficial ownership”.
In April, when the Cabinet approved the plan for screening of FDI proposals from countries bordering India, the government had discussed the option to set the threshold at either 10%, the provision in the Companies Act, or 25%, the prescription in the Prevention of Money Laundering Act.

But six months later, after multiple rounds of discussions, the view seems to have changed. “The (Cabinet) decision did not mention a minimum or maximum limit. So, even it is a small fraction, it will be covered,” a government official told TOI.

A threshold for “significant beneficial ownership” was meant to ensure that Chinese companies did not enter India via third countries such as Singapore or Mauritius.
The move is being closely watched by start-ups, ranging from Paytm to Zomato to BigBasket, which have Chinese investment. Several proposals are also pending government approval.
Sources said an inter-ministerial group met this week and started work on preparing guidelines which would be followed by ministries ranging from commerce and industry to power and telecom. “These will be guidelines to guide ministries on proposals, they will not be binding,” an official said.
Officials said they are looking to finalise guidelines in the next few days, which will also include FDI flows from Hong Kong, while Taiwanese investments are expected to be exempted from the requirement of mandatory clearance.

Separately, the government is toying with the idea of legal changes, which will be discussed at the political level to ensure that the norms are not diluted in future. This may entail amendments to the Companies Act and FEMA, which governs FDI. All FDI changes are notified under FEMA.
The move to tighten rules for investment flows from China followed the tension at the Ladakh border and the growing influence of companies such as Tencent and Alibaba in the Indian start-up ecosystem. Over the years, the government had adopted a sectoral view with only sensitive areas requiring approval, irrespective of the source of FDI flow.

Source: ToI