This note is a summary of discussions with a local Indian law firm, aims to provide preliminary guidance for Chinese investors to invest in or acquire companies incorporated in India.

1. General Environment

Q1: Are there any restrictions for Chinese direct investments in India?  Are these restrictions industry specific?

Inflow into India in the form of investments from China amounted to approximately USD 2,460 million (in the form of foreign direct investment) in the previous two decades[1]. However, in the past few years, there have been substantial changes in India’s regulatory regime pertaining to investments from China. Hence, before we comment on the general attitude of the Indian government, major political parties and people towards Chinese investment in India, it would be pertinent to peruse through the regulatory landscape regarding foreign direct investment in India. from the perspective of a foreign investor.

Press Note 3 Regime

As a protectionist measure towards curbing opportunistic takeovers/acquisitions of Indian companies due to the COVID-19 pandemic, the Government of India (“GoI") had amended India’s foreign direct investment policy (“FDI Policy") through a press note dated April 17, 2020 (“Press Note 3"), wherein any investment from an entity of a country which shares land border with India (“Border Countries") and investments from such countries were to be allowed only under approval from the Ministry of Home Affairs. Press Note 3 applies only to foreign direct investment and not to investments in securities of listed companies through foreign portfolio investments[2]. Given that geographically, the People’s Republic of China shares land border with India, it would also be included in the list of countries to which Press Note 3 applies. Other countries/regions to which the Press Note 3 applies are Hong Kong, Macau, Afghanistan, Bangladesh, Pakistan, Bhutan, Myanmar, and Nepal. 

Press Note 3 requires investors from Border Countries to take approval from the Ministry of Home Affairs for any foreign direct investment into India. The approval required from the Ministry of Home Affairs for the Press Note 3, applies to both direct and indirect foreign investments (including by way of acquisition of shares in an Indian entity) by a Chinese investor, whereunder, approval for indirect foreign investments also includes ‘beneficial ownership’ by a Chinese investor.  The FDI Policy, Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“NDI Rules") or the Press Note 3 do not provide for a definition of the term ‘beneficial owner’. However, in conventional practice till date and according to the undertakings sought by authorized dealer banks facilitating the investment, the definition of ‘beneficial owner’ is borrowed from either the provisions under the Companies (Significant Beneficial Owners) Rules, 2018 read with the Companies Act, 2013 (“CA 2013") or the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA"), both of which  prescribe 10% (ten percent) shareholding/voting in an investee entity as a test along with the test of (whether individually or jointly with other entities or individuals) of significant influence/control directly or indirectly on the policy decisions or management in an investee entity. The authorized dealer banks typically seek necessary undertaking from a foreign investor to confirm compliance with the NDI Rules and that the beneficial owners of such foreign investor (as defined under the CA 2013 or the PMLA) are not residents or citizens of Border Countries.  They also seek an undertaking from a foreign investor that residents or citizens of Border Countries do not cumulatively hold beneficial interest in the foreign investor entity crossing the threshold prescribed in the definition of ‘beneficial owner’, as stated above.

Approval Timelines

The estimated time taken to get a sector specific approval is generally 8 (eight) to 12 (twelve) weeks under the current regime. However, approvals under Press Note. 3 haven’t been forthcoming. In limited sectors such as telecom, infrastructure, it is understood that few approvals have been issued to existing investors to pump in more capital, but largely the approvals for applications made pursuant to the restrictions introduced by Press Note 3 are still pending (including existing investors seeking to put in more monies). Industry insiders were of the belief, sometime in the first few months of 2022[3], that the GoI was contemplating a fast-track process for approvals involving Border Countries in order to reduce the time taken for approvals. However, no such decision has been notified yet.

While the sentiment as regards such approvals are broadly sector agnostic, basis approvals issued so far, it appears that approvals are being considered only for such investments which benefits public interest at large. It may also be inferred that the GoI is concerned about any sector which may lead to access to large scale consumer data to the Chinese entities investing in that sector. This sentiment has been further echoed by virtue of the GoI citing national security concerns over the banning of a multitude of Chinese apps in India. Since June 2020, the GoI has banned nearly 224 (two hundred and twenty-four) Chinese apps citing security reasons including several popular apps.[4]

Q2: From past experience, which industries are Chinese investors particularly interested in?  Are there any emerging areas that can also be attractive to Chinese investors?

Chinese investors, in the past decade, have broadly expressed interest in the sectors of e-commerce, energy, entertainment (including many user generated content segments), finance, technology (specifically telecom), metals, real estate (as regards permissible activities such as development of townships and construction of residential/commercial premises, roads or bridges), transport industries, apart from certain investments in the agriculture, health, and tourism industries with a combined investment of nearly $14.85 billion[5]. Some emerging sectors which have been gathering considerable interest in India and have seen steady growth in foreign investments since 2021 include software-as-a-service, electric mobility, insurtech, embedded lending, agritech and fintech.[6] These emerging sectors may be attractive investment propositions to foreign investors (including Chinese investors) going forward as well.

Q3: Do the local owners generally prefer tenders or auctions, or private discussions with potential buyers? Do they have any special expectations from Chinese investors?

Typically tenders or auctions are conducted for private equity investments in public companies which are listed in the stock exchanges in India. Provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code") may apply in relation to acquisition of shares, voting rights and control in such listed public companies in India, whereby any person who alone or together with persons acting in concert with it, acquires 25% (twenty five percent) or more of the shares or voting rights in a listed public company is required to make a public announcement of an open offer to acquire a further 26% (twenty six percent) of the total shares of the company. Further, any investments in listed public companies in India are closely monitored and regulated by the securities market regulator, the Securities and Exchange Board of India (SEBI).

However, any discussions pertaining to investment opportunities by venture capital or private equity investors in unlisted companies generally happen through private discussions between the investors and the promoters of such potential unlisted companies.

Apart from adhering to the government regulations/laws/guidelines for the investment itself by the Chinese investors, there are generally no special expectations of potential buyers/companies from Chinese investors.

Q4: Will there be any risk of expropriation by the government, and in the case of government expropriation or condemnation of land or other assets acquired by the foreign investor, what would be the compensation, if any?

India has not witnessed any expropriation by way of condemnation of land or other assets acquired by the foreign investor which is practiced by the GoI on foreign entities or foreign investors. Investments done by foreign entities for acquisition land and immovable properties in India prior to introduction of the prohibition on investing in the real estate business under FDI Policy and NDI Rules have also been grandfathered, and accordingly such acquisitions continue to be held by the relevant foreign entities. There has been no indication in the recent past of any land expropriation from the GoI.

Q5: Will it affect the Chinese investor’s ability to invest in India if it is included in the Entity List of the Bureau of Industry and Security under the U.S. Department of Commerce?  To be on the list means the Chinese investor is subject to U.S. export control.

As far as we know, there have been instances of entities included in the Entity List which have continued to invest in India. For example, a Chinese technology company’s investments have remained intact in the Indian technology sector even after its inclusion in the Entity List in the year 2019[7]. However, it should be noted that U.S. based shareholders and entities (including holding or subsidiary entities of Indian companies) may be required to adhere to the Entity List as per laws applicable to them.

2. Regulatory Compliance

Q1: Is there a foreign investment approval regime in India?  If there is, what are the procedures, requirements and timeline to obtain foreign investment approval assuming there are no substantive national security risks associated with the investment?  Is there difference between taking minority stake and acquiring all or majority shares in the target?

It is to be noted that foreign investment in India is not completely subject to an approval regime. However, any approval of foreign direct investment in India can be divided broadly into two groups, i.e. (i) approval for investments from Border Countries (including indirect investments by beneficial owners of such Border Countries) as per the Press Note 3 regime elaborated above, and (ii) sector specific approvals, as per the sectoral regime stated above. Any sector which has not been explicitly covered under the sectoral regime will be eligible for investments under 100% (one hundred percent) automatic route and accordingly, would not require any approval under the sectoral regime. However, Press Note 3 implications would still apply to such investments.

It is also to be noted that the above approval mechanism, along with certain attendant conditions and reporting obligations per the FDI Policy and NDI Rules, would also be applicable to investments in any other Indian entity made by Indian companies or limited liability partnerships (“LLP") which are foreign owned and controlled entities[8]. Such investments are classified as downstream investments under the FDI Policy and NDI Rules.

Further, there are certain reporting obligations for foreign investors and investee companies under the NDI Rules, 2019 whereby depending on the nature of the investment (such as primary investment in the securities of the company, secondary purchase of securities or indirect foreign investment by a foreign owned and controlled entity), a filing of the relevant form (such as Form FC-GPR (for primary investments), Form FC-TRS (for secondary investments) and Form DI (for downstream investments), to name a few) to the Reserve Bank of India, to report the concerned investment.

The difference in acquiring minority stake or acquiring majority stake in a target generally stems from the approval or automatic route of investment, as stated above. A sector specific approval also obligates the target to comply with certain sector specific laws and conditionalities as mentioned in the relevant sector’s specific regulations and the FDI Policy (read with the NDI Rules). For example, foreign investment in the insurance sector is permitted under the automatic route for up to 74% (seventy four percent) stake, however, such investee company would need to obtain necessary licenses or approvals from the Insurance Regulatory and Development Authority of India for undertaking the business of insurance and its related activities.

Considering the above complications on investments, investors from China (or comprising of Chinese beneficial owners) may consider the external commercial borrowing (“ECB") route which is essentially loans provided by non-resident lenders in foreign currency to Indian borrowers. However, caution must be exercised if the ECB route is considered, as the said route contains its own set of challenges for a foreign investor.

ECB can be raised either under the automatic route or the approval route. Under the approval route, the prospective borrowers are required to send their requests for examination and approval to the Reserve Bank of India through their authorized dealer banks who are facilitating the transaction, and under the automatic route, the authorized dealer banks are entitled to examine and approve the transaction themselves. Further, the eligible borrowers for ECB are all entities who are eligible to raise foreign direct investment and certain other entities, such as port trusts, units in special economic zone, export import bank of India and registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/ cooperatives and non-government organizations, as mentioned in the applicable regulations and master directions  governing ECB (“ECB Regulations"). The ECB Regulations also prescribe certain conditions for qualifying as a permitted lender who is eligible to lend ECB to the aforementioned eligible borrowers, such as lenders being resident of an FATF or IOSCO compliant country.

Certain activities for which ECB cannot be raised include real estate activities, investment in capital market and equity investments. Minimum average maturity period for an ECB would be 3 (three) years, however, depending on certain specific categories such as ECB raised by manufacturing companies, ECB raised from foreign equity holders for working capital, general corporate purposes, or repayment of rupee loans (availed domestically for capital expenditure), or ECB raised for on-lending by non-banking financial corporations (NBFCs) (for working capital or general corporate purposes), the minimum average maturity period can range from 1 (one) to 10 (ten) years. Further, there is a specific all-in-cost ceiling for rate of interest, other fees and expenses with respect to such borrowings, as mandated by the Reserve Bank of India which is fixed pursuant to the ongoing benchmark rate plus the applicable basis points.

Some investors with Chinese beneficial owners have been utilizing the abovementioned route to fund Indian companies, with an option to convert the same into capital at a future date. However, any such conversion would still require the restrictions imposed by Press Note 3 to be relaxed and/or approvals under the Press Note 3 become more forthcoming.

Q2: Are there any restrictions on Chinese investors to acquire land or real estate in India?  Will it be different if the acquisition is made through a local subsidiary of the Chinese investor?  If acquired, is there a limit of time to the title or ownership?

Acquisition of land or real estate in India is regulated through Immovable Property Regulations. As stated previously, leasing of immovable property up to 5 (five) years which includes land or real estate by any citizen of China is permitted under the Immovable Property Regulations. However, any acquisition or transfer of land or real estate would require the approval of the Reserve Bank of India. This rule is also applicable for any branch, office or other place of business for carrying on any activity in India for the Chinese investors.

Q3: Is there an anti-trust regime that applies to mergers, acquisitions or business concentration in India?  What is the threshold for filing to such anti-trust authority and how long in general will it take to get anti-trust clearance if the threshold is reached but there are no substantive competition issues?

The anti-trust regime in India is governed by the Competition Act 2002 (“Competition Act") read with various notifications issued by the Ministry of Corporate Affairs, Government of India and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations"). The Competition Commission of India (“CCI") is the off-market regulator responsible for reviewing and assessing mergers and acquisitions in India.

Any transaction which involves an acquisition of shares, control, voting right or assets or merger or amalgamation, which breaches certain asset or turnover thresholds prescribed (“Jurisdictional Thresholds") under the Competition Act is referred to as a ‘combination’ and will require prior notification and approval from the CCI. The Jurisdictional Thresholds[9] are set out in the table below:

The Indian merger control regime is mandatory and suspensory; therefore, where the proposed combination is notifiable, the parties cannot consummate the proposed combination or any part thereof prior to receiving approval of the CCI or until the lapse of 210 days from the date of notice of the ‘combination’ to the CCI. The CCI may either approve the combination unconditionally or, if it concludes that the combination could potentially cause an appreciable adverse effect on competition (“AAEC"), it may either refuse to provide approval or, in order to eliminate AAEC concerns, impose certain obligations on the parties. These obligations could be (i) behavioral in nature, or (ii) in the form of structural modifications, such as requiring disinvestment from particular business lines or even changes to the terms of the transaction.

All combinations mandatorily require prior notification to and approval from the CCI, unless the combination can avail itself of certain exemptions. As such, the merger control regime in India identifies certain categories of combinations which are ordinarily not likely to cause an AAEC. Accordingly, a notice to the CCI is normally not required to be filed for such combinations. However, this is a self-assessment test required to be carried out by the parties to the combination.

Of particular importance to financial sponsors or investors are certain exemptions that are provided in Schedule I of the Combination Regulations. Some of the major exemptions are to combinations, which amount to solely in the nature of investment[11] or in ordinary course of business, that does not entitle the acquirer to hold 25% (twenty five percent) or more of the total shares or voting rights of the target, creeping acquisition between 25 (twenty five)-50 (fifty)%, provided there is no change in control over the target, intragroup mergers and acquisitions, acquisition of shares voting rights in case of corporate actions (like acquisition of shares, voting rights pursuant to bonus issue, stock split, consolidation of the face value of shares or buy-back etc.) and alike. It is important to note that a combination availing of the ‘solely in the nature of investment’ exemption should not entail board rights and veto rights (as they are not provided to ordinary shareholders) as there have been instances of the CCI approval being taken even in minority shareholding situation which is acquisition of less than 10% (ten percent) of shareholding but where the investor has board or veto rights.

In addition to the above exemptions, the Government of India by way of a notification has provided an exemption for combinations where the consolidated value of assets and turnover of the target in India is less than INR 350 crores (approximately CNY 295 million) and INR 1,000 crores (approximately CNY 843 million), respectively. 

In order to achieve efficiencies in terms of approvals, the CCI has introduced a fast-track approval for combinations by way of the ‘Green Channel’ route. It is applicable to those combinations in which there are no vertical, horizontal or complementary overlaps between the target and acquirer group, which can also include the downstream portfolio companies in India. Such a combination would be deemed to have been approved, upon filing a Form I (i.e., short form notice) with the CCI along with the prescribed declaration and receiving an acknowledgment for the same. For filings under the ‘Green Channel’ route, the CCI’s acknowledgement receipt acts as the CCI’s approval order and the parties can consummate the said combination on receiving the CCI’s acknowledgment receipt. This is of particular importance to financial investors who acquire minority positions and have no control or overlap between their group and the target.

To facilitate the parties in the notification process, the CCI provides for pre-filing consultations (“PFC") to parties seeking informal guidance inter-alia on (i) notifiability assessment, (ii) information to be given in the notice to be filed for a proposed combination, and (iii) availability of a fast-track approval by way of the Green Channel route. PFC is an informal, non-binding and verbal consultation with the officers of the CCI, prior to filing of the notice with the CCI. The parties to the proposed combination can make a request for PFC to clarify their doubts and seek suggestions/guidance from officers of the CCI. It generally takes 2-3 weeks to undertake the PFC process.

A notice is filed to the CCI in either Form I (i.e., short form notice) or Form II (i.e., long form notice). Typically, most notices filed with the CCI are filed in Form I. However, the parties to the combination may file a notice in Form II where (i) the parties to the combination are competitors and have a combined market share in the same market of more than 15% and (ii) the parties to the combination are active in vertically linked markets and the combined or individual market share in any of these markets is greater than 25%. In case of a Form I (with minimal overlaps between the business activities of the parties), the CCI approves the combination in 25-40 calendar days from the date of filing the notice. In case of a Form II (with significant overlaps but no substantive competition issues), the CCI approves the combination in 70-90 calendar days from the date of filing the notice.

Recently, the Competition Act has been amended with the presidential assent of the Competition (Amendment) Act, 2023. The said amendment has expanded the definition of combinations to also include transactions with a deal value above INR 2,000 crores in value, provided that the enterprise which is being acquired, taken control of, merged, or amalgamated has substantial business operations in India as may be specified by attendant regulations to be introduced subsequently. As on date, the Competition (Amendment) Act, 2023 is pending notification and hence, is yet to come into force.

Q4: Are there any legal or regulatory restrictions on shareholding, payment schedule and payment method, governing law and venue of dispute resolution, or on other aspects of the acquisition?

In addition to the responses above, as per the NDI Rules, a key restriction on payment schedule is that during acquisition of shares an amount not exceeding 25% (twenty five percent) of the total consideration, may be paid by the buyer on a deferred basis, or may be settled through an escrow arrangement, or may be indemnified by the seller and further any such deferral, escrow should be settled within a period not exceeding 18 (eighteen) months from the date of the transfer agreement. The total consideration shall be compliant with the applicable pricing guidelines. As regards payment methods, the FDI Policy and the NDI Rules only permit undertaking payments through the banking channels in India and subject to the payment of applicable taxes and other duties or levies in India.

The Indian companies in which the investors will invest are generally companies incorporated under the laws of India. Generally, the directors, executive officers and a substantial portion of the assets of such companies are located in India. It may be difficult for foreign investors to obtain a judgment in a court outside India to the extent that there is a default with respect to the security of an Indian issuer or with respect to any other claim that the foreign investor may have against any such issuer or its directors and officers. As a result, even if the foreign investor initiates a suit against the issuer in a jurisdiction outside India, it may not be possible for it to enforce court judgments obtained outside India against Indian companies or the directors and the executive officers of such Indian companies and obtain expeditious adjudication of an original action in an Indian court to enforce liabilities against Indian companies or the directors and executive officers of such Indian companies. A judgment of a court, (which has to direct the payment of a certain sum against the defendant) in a jurisdiction that is not a reciprocating territory, may be enforced only by instituting a fresh suit upon the judgment passed by the non-reciprocating country and not by proceedings in execution. It is uncertain as to whether an Indian court would enforce foreign judgments that would contravene or violate Indian law or public policy. Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages awarded as excessive, as a penalty or inconsistent with public policy.

Given the backlog of suits pending disposal in India and punitive, exemplary or indirect damages being off the table, in order to achieve efficiencies of time in terms of dispute resolution, it is common practice to have dispute resolution clauses in deal documents. In deals involving Chinese investors, one of the most preferred arbitration fora has been arbitration under the Singapore International Arbitration Centre (“SIAC") and its applicable rules and regulations. In many cases the governing law for such arbitration clauses as well as the main contract continues to Indian laws and the venue is decided as per mutual agreement amongst the parties.

[Note] 

[1] https://dpiit.gov.in/sites/default/files/FDI_Factsheet_December_2022.pdf

[2] Foreign portfolio investment is defined under the NDI Rules as any investment made by a person resident outside India through equity instruments where such investment is less than ten percent of the post issue paid-up share capital on a fully diluted basis.

[3] https://www.livemint.com/politics/policy/govt-expedites-fdi-from-neighbouring-countries-11644347018083.html

[4] https://timesofindia.indiatimes.com/gadgets-news/india-bans-chinese-apps-number-and-names-of-apps-banned-why-and-more/articleshow/89563101.cms   

[5] https://www.aei.org/china-global-investment-tracker/

[6] https://www.bain.com/insights/india-venture-capital-report-2023/

[7] https://www.federalregister.gov/documents/2019/05/21/2019-10616/addition-of-entities-to-the-entity-list

[8] “ownership of an Indian company" shall mean beneficial holding of more than fifty percent of the equity instruments of such company and “ownership of an LLP" shall mean contribution of more than fifty percent in its capital and having majority profit share; “control" shall mean the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreement and for the purpose of LLP, “control" shall mean the right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP.

[9] In the event any of the tests under the Jurisdictional Thresholds are met, the proposed transaction will qualify as a ‘combination’ and require notification with the CCI (unless the parties are able to take advantage of any of the exemptions provided in the Competition Act, the Combination Regulations or the notifications issued by the Government of India from time to time).

[10] The value of assets and turnover thresholds applicable to combinations comprise the tests mentioned above, which are applicable to the immediate parties to the transaction and separately to the group to which the target will belong and have both Indian and worldwide dimensions.

[11] According to the Combination Regulations, the acquisition of less than 10% of the total shares or voting rights of an enterprise shall be treated as solely as an investment , provided that in relation to the said acquisition, (a) the acquirer has ability to exercise only such rights that are exercisable by the ordinary shareholders of the enterprise whose shares or voting rights are being acquired to the extent of their respective shareholding; and (b) the acquirer is not a member of the board of directors of the enterprise whose shares or voting rights are being acquired and does not have a right or intention to nominate a director on the board of directors of the enterprise whose shares or voting rights are being acquired and does not intend to participate in the affairs or management of the enterprise whose shares or voting rights are being acquired.