Recently, certain media sources have stated that the Government of India is seriously considering putting in place effective measures to significantly lower time period required to consider and dispose off proposals for Foreign Direct Investment (FDI) from China into Joint Ventures (JV) companies in India, This is indeed a significant development in the context of India's FDI policy, in view of severe restrictions earlier placed vide Press Note 3 of 2020.

In April 2020, the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry of India had released Press Note 3 of 2020. The primary objective of this directive was to regulate the influx of FDI from countries that share a land border with India, including China. Earlier, the FDI policy mandated prior government approval for FDI from Bangladesh and Pakistan alone. However, Press Note 3 expanded this requirement to FDI from all neighbouring countries. It necessitated government approval for investments from these nations in any sector, except for defence, space, atomic energy, and sectors/activities where foreign investment is prohibited. Furthermore, the press note clarified that any change in ownership leading to beneficial ownership falling under these countries would also require prior government approval. The policy was designed to ensure government approval for FDI from neighbouring countries, eliminating any automatic route. This measure was widely viewed as a protective step to prevent the potential hostile takeovers of Indian companies during the COVID-19 pandemic, promoting a more cautious and controlled investment framework from these nations.

The recent statement by the government sources indicating adoption of measures for faster disposal of proposals for FDI in Joint Ventures between Indian and Chinese companies may suggest a softening stance towards investments from China. Such proposals have so far been facing intense scrutiny leading to considerable delays, following the issuance of Press Note 3 in 2020. This development could potentially result in changes in application procedures to ease processing of proposals.

It is expected that such JV proposals may be required to fulfil certain conditions for expedited approvals. The conditions may be aimed to ensure national security and to safeguard the economic interests of India. Here are the key conditions and considerations for JVs under Press Note 3 for expedited approvals:

1. Critical Technology and Investment: For fast-track JV approvals, the JV proposals are encouraged to bring advanced technology to India that can be adapted and further developed locally. The condition aims at technology transfer to the Indian entities, which helps in upgrading the local technological base. This not only includes the direct transfer of technology but also encompasses building capacities for research and development within India. The proposed investment should not just be in terms of monetary value but also in building infrastructure that supports the local supply chain. This could mean setting up manufacturing units, training centres, or research and development facilities that employ local resources and utilize local materials. To ensure compliance with this condition, the government may require regular reporting on how the JV or investment is contributing to the development of the local supply chain. This could include details on local sourcing percentages, investment in local infrastructure, and initiatives taken to support local businesses.

2. Restrictions on Chinese Nationals and Minority Stake: The second set of conditions focuses on the governance structure of the investee company and the stake of the Chinese partner. Specifically, it is mandated that the management and board of the Indian company should not have Chinese nationals in key positions such as Managing Director (MD), Chief Executive Officer (CEO), or Finance Chief. Additionally, the Chinese partner is allowed only a minority stake in any partnership. These conditions are aimed at addressing national security concerns by limiting the influence that Chinese investors can have on the strategic decisions and financial operations of the Indian company. Legally, this implies that JV agreements and corporate governance structures will need to be carefully structured to comply with these stipulations, potentially involving clauses that restrict the appointment of Chinese nationals to senior management roles and cap the equity stake held by the Chinese partner.

CHRI Legal Comment:

This initiative is considered innovative, as JVs seeking expedited approvals will be required to comply with conditions that streamline the approval process, ensure adherence to regulatory standards, and reduce risks associated with JV operations. The expedited approval conditions for Indian and Chinese JV proposals indicate a strategic shift in India's FDI policy. This shift aims to encourage investments that are in line with national interests while safeguarding against security issues. Legally, this change introduces precise requirements for technology transfer, corporate governance, and ownership structures, which require meticulous legal planning and documentation for companies intending to establish such JVs.