The Government of India taken bold steps by shifting Chinese Foreign investment in India from

the Automatic route to Approval Route through a DPIIT Press note released in April 2020.

The government of India is forecasting that Chinese investment may lead to a severe disruption
of the economy. Chinese investment firms and HNI are actively investing in India. In 2019,
China contributed $8 billion Foreign Direct Investment. Due to the Pandemic, business is widely
affected after lock-down; the valuation is likely to decline by 10 % to 50%. In such a slowdown
scenario, Chinese investment may be deployed for a hostile takeover of Indian business.

The Point to be noted that the current change in FDI regulation has not banned the Chinese
investment in India, but any investment which is coming from China directly or indirectly by
the Chinese resident or Citizen or via fund house or VC or PE shall be highly monitored and
DIPP will approve it after review of the purpose and end-use of the fund, verification of PRC
Profile, Business or Industry where the fund will deploy and other compliance shall meet by the
investor before investing in India.

There is no change in Chinese investment activity. Earlier prohibited sectors like defence, space,
and atomic energy will continue as the Prohibited sector. All other sectors which were opened
for Chinese investment in India are now shifted to government approval from Automatic
approval. Major slowdown in Chinese investment will be experienced for investment in fintech,
Energy, Infrastructure, technology, manufacturing, NBFC, Ecommerce, Payment business, and
others.

Hence it can be implied that Chinese Businesses can still infuse funds in India if the intention of
such a fund is not to gain control in the Indian Company at a later stage. So, a tool like External
Commercial Borrowing (ECB) can still be used by companies having prior investment from
China.

As per the amended foreign direct investment policy, investments coming from countries that
share a border with India will now have to get a prior government approval. This step was taken
by the government to ward off opportunistic take-over of Indian assists buy Chinese companies.
Now, in this scenario, if a company is in need of emergency funding from China, the ECB is the
best route since the transaction can be closed within a week, legal experts said. Subsequently, if
the parent company wants, it can convert this debt into equity. However, such a conversion will
need government approval since equity is part of FDI norms. The ECB route also comes with its
own set of restrictions. The foreign entity looking to invest in an Indian firm should hold at least
25 per cent of the Indian company. In other words, this route can only be used by Indian
subsidiaries and joint ventures of Chinese companies.