Start-up funding: FDI restrictions of April will only have temporary impact, says CEA Subramanian

The Finance Ministry expects the foreign investment restrictions — introduced in April this year (press note 3) against investments from China and other countries with which India shares a land border — to have only “temporary impact” on start-up funding in the country, a top official said.

The increased interest among private equity investors from other countries (like US and those in EU) will have a “substitution” effect and fill the space, Chief Economic Advisor Krishnamurthy Subramanian said on Wednesday. He was speaking at a FICCI organised virtual session on ‘Investment opportunities in stressed assets in India’.

Asked as to what is the impact of indirect investments from Hong Kong into India and will this be subject to government approval under new regime of press note 3, Subramanian replied to this specific question at a broader level: “Yes, investments coming from across the border from country with which we have tensions right now ..actually those need to be scrutinised. That includes not only the direct ones even indirect ones as well”.

He said there will be some impact on start-up funding in short run but within some time that space will get filled. “Private equity players from other countries are keen to participate in the Indian startup ecosystem. This impact will be temporary and substitution will happen,” he added.

It may be recalled that the government had in April this year amended the foreign direct investment policy to curb opportunistic takeovers/acquisitions of Indian companies due to the pandemic.

The change in FDI policy expanded the list of countries whose investors are no longer eligible to invest in India under the automatic route. Also, an investment in India — that would otherwise fall under automatic route— now falls under the government route if it the investing entity has a “beneficial owner” who is from such bordering country.

The private equity industry in India had earlier this year sought clarity from the government as to whether press note 3 will cover entities within Hong Kong operating as regional headquarters or having holding companies even though it may not share a land border with India.

The Finance Ministry’s view is that Hong Kong, being a territory of China, needed to conform to the newly altered investment rules for those countries with which India shares land border.

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