New FDI rules bar automatic investments by neighbouring countries

The government has amended the Foreign Direct Investment (FDI) policy to discourage opportunistic investment in Indian companies made vulnerable due business disruption and falling stock prices on account of Covid-19 pandemic by neighbouring countries,This comes after China’s central bank recently raised stake in Housing Development Finance Corporation (HDFC) to a little over 1 percent.

 India’s FDI policy allows foreign investment in certain sectors under the automatic route and up to the limit set out in that sector. For instance 100 percent FDI is permitted under the automatic route in manufacturing, oil and gas, greenfield airports, construction, railway infrastructure etc. In other sectors, FDI is allowed under the automatic route upto a certain threshold.

As per the new amendment, FDI investments into Indian companies from the neighbouring countries will now require a nod from the government. This will be applicable to all countries that share a land border with India – such as China among others. The amendment specifies that transfer of ownership of Indian companies arising out of FDI investments from neighbouring countries will now also be subject to government approval.

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Foreign direct investment (FDI) is when a company takes controlling ownership in a business entity in another country. With FDI, foreign companies are directly involved with day-to-day operations in the other country. This means they aren’t just bringing money with them, but also knowledge, skills and technology.

A foreign institutional investor (FII) is an investor or investment fund investing in a country outside of the one in which it is registered or headquartered; outside entities investing in the nation’s financial markets. FIIs can include hedge funds, insurance companies, pension funds, investment banks, and mutual funds.

 

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