India to Tighten KYC Rules for Hong Kong, China FPIs

Alongside stricter KYC procedures during FPI registration, India may set a 10% beneficial ownership cap on foreign investment from China including Hong Kong.

India is reportedly considering additional checks on FPIs (foreign portfolio investors) from China and Hong Kong, after having already made prior government clearance mandatory for any FDI (foreign direct investment) from seven countries it shares land borders with, including China.

Concerns about investment flows from China were first raised when the PBOC (People’s Bank of China) increased its stake in mortgage lender HDFC (Housing Development Finance Corp) to over 1 percent last month, prompting the introduction of a pre-approval requirement for all FDI from seven countries including China to curb “opportunistic takeovers or acquisitions” of Indian companies.

> ALSO READ: India’s New Foreign Investment Rules ‘Discriminatory’, says China (21 Apr 2020)

Stricter KYC

India’s Ministry of Finance is now said to be in talks with the Ministry of Commerce and Industry, SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India) on a proposed framework that will require FPIs from China and Hong Kong to undergo more stringent KYC procedures at the time of registration.

Separate mechanisms may also be put in place to ensure prior regulatory or government clearance for these FPIs to invest in listed entities.

According to the Economic Times, a dedicated cell could be set up to scrutinise new FPI registrations from China and Hong Kong, as well as the investments they make.

“The government and market regulator have already begun collecting details on Chinese investments and ultimate beneficial owners of FPIs based in China through SEBI, and this additional data gathering is aimed to create barriers for Chinese investors,” said an expert on foreign investment cited in the report. “Chinese funds have begun slowing their investments in India and are in wait-and-watch mode.”

Beneficial ownership

Meanwhile, the Ministry of Finance is also said to be working with the DPIIT (Department for Promotion of Industry and Internal Trade) to define the beneficial ownership threshold beyond which prior clearance will be necessary.

Business Standard and Money Control recently reported that India is likely to set a 10 percent beneficial ownership cap for foreign investment flowing into a domestic company from the seven bordering countries including China.

This is based on rules for significant beneficial owners under India’s Companies Act, which requires individuals who, alone or in conjunction with others, hold at least 10 percent of a domestic company’s shares, voting rights or dividends to make a declaration specifying the nature of the beneficial interest.

> To learn more about managing multi-jurisdictional shareholder disclosure requirements, sign up for this webinar.

While India seeks to restrain Chinese investment in the country to protect domestic industry, Finance Minister Nirmala Sitharaman recently announced that the limits on foreign investment in defence manufacturing will be eased.

Under the plan, foreign investors would be able to own up to a 74 percent stake in defence manufacturing ventures, up from the current 49 percent limit, without government approval (via the ‘automatic route’). The new limit does not apply to investments from China and the other border-sharing nations, following the FDI policy change last month.

The move is said to be aimed at attracting foreign companies with high-end technologies to set up manufacturing facilities in India in collaboration with local companies, in a bid to reduce reliance on foreign weapons manufacturers and the associated costs of such defence-related imports.

It is unclear whether last month’s FDI policy change was a preemptive measure to specifically prevent Chinese investment from flowing into the defence manufacturing sector.

Funding sources

With regard to China, a broader discussion is underway about whether Indian companies that have relied on Chinese investors for their success will continue to see inflows.

A case in point is Paytm, India’s largest mobile payments and commerce platform, currently valued at over USD 16 billion. Alibaba and its affiliate Ant Financial are major shareholders in the company, with a combined stake of about 38 percent.

Concerns about capital flows from China are a bigger issue for smaller firms and tech startups, which will struggle to find alternative sources of funding as the rest of the world, and India itself, go into recession.

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