Foreign investment rules: FPI investment by the Chinese
September 24, 2020 6:10 AM
Should the government give regulators and licensing authorities the power to act in national interest?
The rule was also to transfer of ownership of any existing or future FDI in an entity in India.
By Kaushalya Venkataraman
In March 2020, amidst the lockdown, there were reports that the People’s Bank of China had increased its stake in HDFC Limited to 1.1%. This created a furore in the market as many people viewed this as opportunistic buying amid a stock market crash. In response, the Indian government came out with the Press Note 3 of 2020, which stated that an entity of a country which shares land borders with India (neighbouring country) or where the beneficial owner of investment into India is situated or is a citizen of a neighbouring country, can invest only under the government route. The rule was also to transfer of ownership of any existing or future FDI in an entity in India. Though the rule itself was simplistic, many questions remain unanswered. The biggest ones being the definition of ‘beneficial ownership’, the definition of neighbouring countries, and whether the rule extended only to foreign direct investment (FDI) or whether it applied to all types of foreign investment as referred to in the PN 3 of 2020, including FPI/ FVCI.
In the meanwhile, political tensions with China reached an all-time high, and there was a military standoff at the LAC. At this time, reports suggested that the Indian government was obtaining information from RBI and SEBI on the registered FPI from China in India for closer scrutiny of their investment, though no final decision had yet been made in this regard.
At the end of April 2020, the Indian government notified the amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, through which it was made clear that the restriction applied only for investments or transfers under the foreign direct investment route. The argument, in this case, to have the restriction apply only under the FDI Route is that FPI investment in any one company is capped at 10% shareholding of the company (thus making opportunistic takeovers unlikely) and when it comes to FVCI this limit is 25% shareholding of the company.
In light of this clarification in early May 2020, the FPI registration of the People’s Bank of China (PBoC) was renewed until May 2023 (as per the public records available in NSDL). Once again, this created a furore in the market. Many questioned how the FPI registration of PBoC was renewed, given the political tensions. To this, the regulator clarified that as per the law, as it currently stood, a certificate of registration granted by SEBI was permanent and remained valid, unless it was surrendered by the FPI or suspended or cancelled under the prescribed law and procedure. The renewal process has also been delegated to the depository participant (DP), and there is automatic renewal upon payment of the requisite fee. Thus, the FPI registration of PBoC got renewed. Further to this, PBoC has also been buying stocks in the stock market, including its recent acquisition of shares in ICICI Bank Limited through a qualified institutional placement.
The renewal of the PBoC FPI license does raise some pertinent questions on the measures that the executive can take. Take, for instance, the ban on Chinese apps; the Central Government has been systemically weeding out Chinese apps from the ecosystem using its powers under Section 69A of the Information Technology Act, 2000, in the interest of ‘sovereignty and integrity’ of India. Though the executive in this case (Sebi) does have very broad residuary powers it does not have an explicit residuary power to act in the interest of ‘sovereignty and integrity’. It is perhaps worth considering whether the executive (especially regulators and licensing authorities) should have this residuary power to act in the interest of the ‘sovereignty and integrity’with the appropriate checks and balances in place.
The author is Partner, Chandhiok and Mahajan. Views are personal