Update: India Has Approved 124 FDI Proposals from Neighboring Countries Since 2020

Since 2020, India has approved 124 foreign direct investment (FDI) proposals from neighboring countries and rejected 201, following amendments to regulations governing investors from border nations. India has formed an inter-ministerial committee to examine such FDI proposals, impacting industries like manufacturing, software, trading, and e-commerce. 

According to recent media reports, out of 526 foreign direct investment (FDI) proposals that India received from its neighboring countries, 124 proposals have been approved, 201 were rejected, and 200 have been pending since 2020.

In April 2020, India enforced mandatory prior government approval for FDI from neighboring countries, regardless of sectoral restrictions, by revising Press Note 3 (PN3).

India is evaluating FDI clearance implications

As of December 2023, India has received FDI proposals worth about INR 1 trillion (US$11.9 billion) since April 2020 from countries sharing land borders.

While most proposals originated from China, a few proposals originated from Bangladesh and Nepal.

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India is processing ongoing discussions regarding potential refinements to these FDI restrictions, but no decisions have been made yet.

Experts believe that although these proposals represent a negligible portion of FDI, there may be broader implications. Concerned authorities at the federal level aim to strike a balance by permitting investments beneficial to India’s manufacturing sector while safeguarding against potential risks.

READ: How is India Treating FDI Proposals Involving Chinese Entities?

Safeguarding investment ecosystem

India amended its FDI Policy through Press Note 3 (2020) issued on April 17, 2020. According to this note, if an entity from a nation sharing a land border with India (namely China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan), or if a citizen or permanent resident of any such country, is the beneficial owner of an investment in India, they are required to pursue investment through the government approval route.

Indicative of the prolonged security and clearance assessment, back in 2022, Minister of State for Commerce and Industry Som Parkash said in the lower house of the Indian parliament that out of 347 FDI proposals received from neighboring countries, only 66 had been granted approval by the government; 193 cases were rejected, closed, or withdrawn. The total value of investments in these 66 proposals aggregated to INR 136.2 billion (US$1.6 billion).

Amendments to investment laws

With the outbreak of the COVID-19 pandemic in 2020, India announced its decision to enact amendments to some of its existing investment laws. At the time, the decision was made to avoid possible opportunistic acquisitions from neighboring countries.

Foreign Direct Investment Policy of the Government of India (“FDI Policy”) – Press Note 3 of 2020.
The Government of India, on April 17, 2020, revised its existing FDI policy via Press Note 3 of 2020 (“PN 3”) to provide that:
(a) A non-resident entity can invest in India, subject to the FDI policy, except in sectors/activities that are prohibited.
However, an entity of a country, that shares a land border with India or where the beneficial owner of an investment in India is situated in or is a citizen of any such country can invest only under the government route. The government route requires that prior approval from it be procured for the investment.

Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2020 (“NDI Amendment Rules”).

The Indian Ministry of Finance issued the NDI Amendment Rules on April 22, 2020, which amended the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 to provide for as follows:
– That 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 such country shall invest in an Indian company only with the government’s approval.
– That a citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the government route, in sectors or activities other than defense, space, atomic energy, and such other sectors or activities prohibited for foreign investment.
– Also, in the event 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 aforesaid provisos set out in (i) and (ii) above, such a subsequent change in beneficial ownership shall also require government approval.

Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules 2020 (“NDI Fourth Amendment Rules”).

India’s ministries of home affairs and external affairs are in charge of the vetting process that is applied to investment applications from neighboring nations. These FDI proposals are primarily related to the following industries: heavy machinery, automotive, computer software and hardware for car components, trading, e-commerce, and light engineering and electrical manufacturing.

Summary

India has been rigorously evaluating investment proposals from neighboring countries since 2020, with amendments to regulations guiding such investments. Though there are ongoing discussions debating the merits and unintended consequences of such a restrictive policy, the government has stated that these proposals would have minimal impact on India’s FDI landscape.

(US$ 1= INR 83.42)

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