The government is likely to issue clarifications to its recent notification that altered foreign direct investment (FDI) norms for Chinese companies planning to invest in India, two people aware of the development said requesting anonymity.
The fresh changes had left businesses with unanswered questions on the “beneficial ownership" of foreign investment arms looking to invest in the country.
“The government is in receipt of industry representations seeking clarity on what percentage of shareholding in an investment vehicle will constitute beneficial ownership. It’s a policy-level decision on whether the intent is to scrutinise all flows from China or prevent acquisition of Indian companies at depressed valuation. The government does not want to prevent any investment—just scrutinise the deals to ensure that investments are fair and Indian promoters are not losing control of strategically important companies at depressed valuations," said a government official, the first of the two people cited above.
The notification in its current form had put a question mark on fresh investments in several Indian technology companies as owning even a single share could, theoretically, be defined as beneficial ownership and lead to foreign entities (with any China money) requiring prior government approval.
One suggestion has been to keep the Companies Act 2013 threshold of 10% shareholding in a company to define significant beneficial ownership, said the second of the two people quoted above.
“The other is to keep it at 25%, which is the minimum threshold defined under the Securities and Exchange Board of India (Sebi) Act. The government will also clarify on the aspects of indirect acquisitions so that it does not affect genuine fund infusion," he said.
“The government has been in consultations with stakeholders such as investors, private equity players, foreign portfolio investors in relation to the Fema (Foreign Exchange Management Act) notification, including on the aspect of defining indirect acquisition of shares. Therefore, unless a threshold is prescribed for indirect acquisition of Indian companies, it will be difficult for fresh investments as it could capture structures from Hong Kong, Singapore and Mauritius wherever Chinese investors are sitting in the investment vehicle. The Indian government is cognisant of the unintended consequences of notification," said Shardul Shroff, executive chairman, Shardul Amarchand Mangaldas.
The government had on 22 April issued a notification under Fema which required investments originating from seven neighbouring countries including China, to seek prior approval of the government.
Since the changes, several private equity funds have sent representations to the government stating that the new rules should allow minority stake investments in Indian startups of up to 24% in the first round of fund-raising without prior government approval.
Shayan Ghosh in Mumbai contributed to this story.