As companies across the globe battled the uncertainty that the pandemic brought on in 2020, several economies began to raise concerns about opportunistic takeovers of entities stressed by pandemic in their country.
Therefore, they imposed restrictions on foreign investments which could be ‘predatory’ in nature and to ensure that assets in sensitive sectors do not end up in foreign hands, jeopardising national security. Against this backdrop, India introduced Press Note 3 (PN3) in 2020, which required all foreign direct investment (FDI) proposals from an entity based in a country that shares a land border with India, or where the beneficial owner of such FDI is situated in a country which shares a land border with India — both referred to as “restricted entities” — were brought under the government approval route.
However, there has been a series of important developments since the issuance of PN3, resulting in a need to update and rationalise it. As India’s vaccination drive gathered steam and reasonable control over Covid cases was established, the economy improved as well. As per IMF projections,India is likely to clock a growth rate of 8.2 per cent, which is high when compared to other major economies.
During this period, the government also introduced several bold reform measures like opening up of travel and tourism, scrapping the controversial retrospective tax imposed in 2012 on transfer of Indian assets, ending vexatious litigations with 17 companies including Cairn and Vodafone, and infusing a new life into the earlier moribund telecom sector. Therefore, the present healthy trends may potentially ward off any attempts of ‘opportunistic takeovers’ as feared earlier.
On the global front, there have been radical changes in the geopolitical situation after the Russia-Ukraine war, which has severely impacted the global economy and created potentially huge inflationary pressures, forcing countries to review their policies.
In this situation, there is a need to review PN3 to boost legitimate investments, particularly from sources like ‘pooled funds’. These are investment vehicles that pool money from multiple investors and are managed by fund managers who independently and professionally drive the investment strategy for delivering returns for their investors. There are some additional areas for simplifying PN3 which could also be considered:
Exemption of low hanging fruits: Effectively, investments from restricted entities constituting less than 10 per cent (or even 5 per cent) of the economic interests of an Indian company, in non-strategic sectors, regardless of investment route, could be exempted from the prior approval requirement.
The rationale would be that such minority shareholding of ‘restricted entities’ may not be able to influence control/direction of the entities.
Clarification on scope and ambit of ‘beneficial ownership’: As the ambit and extent of “beneficial ownership” has not been elaborated under PN3, considerable discussion has taken place on acceptable threshold of ‘beneficial ownership’.
Taking a cue from several other regulations (for example, in public procurement and also in regulations relating to money laundering), one may be tempted to effectively impose a beneficial ownership threshold of less than 25 per cent and, therefore, there could be a mechanism involving relaxation for investors where the ultimate beneficial ownership or control is less than 25 per cent.
This could also include companies listed on overseas stock exchanges wherein restricted shareholders hold less than 25 per cent of listed stock.
Further investments into Indian companies where restricted entities are existing shareholders: It is well known that a number of start-up sectors (e-commerce, technology, social media, etc) in India have substantial amounts of Chinese investments. Considering the curbs placed on fresh investments under PN3, incoming and existing investors looking to participate in fund-raising rounds by such start-ups might hesitate.
As the intention behind PN3 has been to prevent opportunistic takeovers, screening future rounds of funding or acquisitions by restricted entities in companies already owned and controlled by such restricted entities may be relaxed since the question of an opportunistic takeover may not arise.
Need for greater transparency and expediency in the approval process: Another challenge in the context of PN3 has been the time taken for security clearance of the proposals. According to recent reports, since 2020 nearly 347 proposals have been received under PN3, of which, only 66 have been granted approval so far.
While the security risk posed by Chinese entities persists, there an urgent need for Indian entities to raise funds, particularly in the current geopolitical situation and more so in strategic sectors.
The Indian economy has exhibited great resilience and upswing during and after the Covid pandemic, as evidenced by reassuring FDI inflows and growth of a record number of unicorns, which has just crossed 100 during the period. Now when the economy is accelerating, there is a need to ensure greater facilitation, transparency and time-bound decision-making.
The writer is a former Chairman of the Competition Commission of India and a former Executive Director at the World Bank