governments across the world have brought into force restrictions
on foreign investments. These restrictions are aimed at protecting
the companies from hostile takeovers/acquisitions at a time when
valuations have been significantly impacted due to the
ongoing COVID-19 pandemic.
the extant Foreign Direct Investment (FDI) regime in
India, non-resident entities are permitted to invest in various
sectors in India (for e.g., manufacturing, broadcasting, trading,
etc.). Investments in most of these sectors is permitted to be
undertaken without any approval from the government, i.e., under
the automatic route.
Thus, the New Rules extend the requirement of prior approval from the government to investments from entities residing in China, Nepal, Myanmar, Bhutan and Afghanistan (all of which share a land border with India) (Restricted Investors).
quick look at the current status of investments in India from the
Restricted Investors indicates that investments from China
(including by financial investors having Chinese investments) are
likely to be the most affected by the New Rules. Chinese venture
capital funds and technology companies have significant stake in
Indian companies, especially in the Indian tech space.
The impact of the New Rules is unlikely to be limited to
Restricted Investors alone. Investors and other shareholders in
companies having investment from Restricted Investors, may also
face difficulties in enforcing their rights under the transaction
documents. For e.g., exercise of a pre- emption right (as
available to all investors/shareholders) may prove to be
New Rules leave several points open to interpretation. Some of
these points are set out below: