Aimed at China, Govt amends FEMA rules to regulate FDI

Without taking any time, the Indian government has amended the existing foreign exchange management act (FEMA) to regulate newly formulated rules for foreign direct investment (FDI) in India by border sharing countries.

The development comes soon after China officially slammed the new FDI rules by the Indian government, calling it a violation of WTO principles of non-discrimination and against free and fair trade.

According to the latest notification released by the ministry of finance, an entity of a country, which shares a land border with India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country, shall invest only with the Government approval.

The new rule in  FEMA Act 2020 has already been mentioned in the government’s new FDI rules dated April 18.

The rule further stated that a citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the Government route, in sectors or activities other than defence, space, atomic energy, and such other sectors or activities prohibited for foreign investment. 

In case of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction or purview of the above provisos, such subsequent change in beneficial ownership shall also require government approval, said the new FEMA rule.

While some stakeholders were hoping that the notification would take time and there may be a short window to squeeze in money from China, the government has acted quickly on the matter leaving no space for any loophole.

The rule, particularly, will restrict China from taking advantage of the dip in the market due to covid19 outbreak. The world’s second-largest economy has been trying to buy distressed assets in many countries. Recently, China’s central bank had bought a little over 1% stakes in India’s mortgage lender HDFC.

Besides, the new FDI rules framed by India will also affect indirect investments made by China.

Not only India, Italy, Spain, Australia and Germany have also tightened their FDI policies to prohibit such deals by foreign entities.