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This article is written by Naresh Trivedi who is pursuing a Diploma in International Business Law from LawSikho.


Pandemic!! Battered Economies!! Market Corrections!!

China sensed a great opportunity in the above conditions faced by the world. The Chinese business houses and the Government were on a buying spree across the continents of the world.

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The newspapers and the business magazines were flooded with Chinese investment articles. During the rise of the pandemic in the mid-2020s the Chinese state-owned enterprises had a substantial stake in German-based large scale projects, this step leveraged the Chinese enterprises to have access to advanced technology.

Coming to India, China’s central bank, People’s Bank of China (PBoC) had acquired 1.01% stake in HDFC up to March 31, 2021. The stock price of HDFC had cracked sharply due to the pandemic effect in March, 2020 and April, 2020. During the same time many Indian blue chips companies stock prices had tumbled to south. The Indian Government decided to act quickly in order to avoid any untoward mishap in the Indian Corporate World.

The ball was set to roll, the Government of India assessed the FDI policy and decided to curb the opportunistic takeovers and acquisitions of the Indian companies due to pandemic and issued the press note dated April 17, 2020, to amend the FDI Policy. Subsequently, the Ministry of Finance, Department of Economic Affairs had notified the press note contents in form of FEMA Rules as the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 dated April 22, 2020. The Government of India tried to rein the Chinese dragon through the promulgated press note, which could have far-reaching effect on the Indian startup ecosystem, considering the substantial investment by the Chinese investors. 

In addition to the pandemic, the geopolitical tensions between the neighbouring nations too added fuel to the fire. As a result, the Government of India decided to block Chinese apps in India and those apps which have substantial Chinese investment.

However, the step to block Chinese apps by the Government of India was majorly taken to protect the privacy data. One of the major Chinese apps TikTok was caught stealing the app-users data from the clipboard. Additionally, many other Chinese apps had their data storage servers in China, which grossly breached the local privacy laws.

Without deviating further from the topic let’s a drawback to the FDI concerns faced by Zomato, post notification of revised norms.

Anomalies ahead for startups

No doubt, the Government of India had taken the bold step to avoid any opportunistic hostile takeover and mergers in the Indian corporate world, more particularly startups. But it had added the additional burden on the Indian companies to avail prior permission of the Government in order to seek investment for the bordering nations.

Position prior to amendment

The non-residents were allowed to invest in India, subject to FDI Policy except in those sectors/activities which were prohibited. However, a citizen of Bangladesh or Pakistan or an entity incorporated in Bangladesh or Pakistan could invest only under the Government approval route in sectors/activities which were not prohibited.

Position post amendment

The non-residents were allowed to invest in India, subject to FDI Policy except in those sectors/activities which were prohibited. However, an entity of a country that shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country could invest only under the Government approval route in sectors/activities which were not prohibited.

From the above position, it is clear that earlier it was only Bangladesh and Pakistan citizens or entities incorporated in Bangladesh and Pakistan were allowed to invest in India, subject to the approval of the Government of India.

Post amendment, the citizens and the entities or those entities which had beneficial owners from such countries sharing a land border with India, viz China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan were allowed to invest in India subject to the approval of the Government of India.   

Prior to amendment, it was plain vanilla due diligence for investee company in India to identify the citizenship of the investor, by looking at the passport, etc., or the place of residence of the entity by merely perusing the incorporation documents of the entity.

Post amendment the investee company has to thoroughly scrutinize the origin of an entity as well as the beneficial owners of the investor company. However, the term beneficial owner is not defined under the notification or the FEMA laws prevailing in the country. 

Alternatively, the definition can be borrowed either from the Companies (Significant Beneficial Owners) Rules, 2018 as framed under the Companies Act, 2013 or from the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

From Zomato’s lens

Zomato in October 2018 had raised $210 million from Alibaba’s payment affiliate Ant Financial Services, Alipay Singapore Holdings Pte Ltd. In this investment round, Ant Financial Services had received ownership of a stake of over 14.7% in Zomato. Additionally, Ant Financial Services has invested $150 million during early 2018. Therefore, the shareholding of Ant Financial Services had reached to around 22% in Zomato at one point before the notification of the press note as referred above.

Subsequently, on January 9, 2020, Zomato and its founders had entered into a definitive agreement with Antfin Singapore Holdings Pte Ltd for the investment of $150 million in form of two separate tranches of $50 million and $100 million. However, the transaction pertaining to $50 million was duly undertaking by Zomato before the release of the aforesaid press note. Unfortunately, Zomato founders had to drop the plan with respect to the investment of $100 million in the Company.

Zomato struggled to get another $100 million investment tranche from Antfin Singapore Holdings Pte Ltd out of the committed investment of $150 million. With the restrictions imposed by the Government of India and the aforesaid notification dated April 22, 2020, in place the Chinese entity, Antfin Singapore Holdings Pte Ltd could not invest further in India without the approval of the Government of India.

The approval requirement could include additional costs to Chinses entity and as well to Zomato, therefore, the additional tranche of investment of $100 million was called off by Zomato.

It would have been hard for Zomato to give away the $100 million investment from Antfin Singapore Holdings Pte Ltd. On the contrary, Zomato was relieved to understand the grandfathering effect allowed on the earlier Chinese investments received in the Company. Rather, the Government of India was silent on the earlier investments received by Indian companies from Chinese entities. 

However, the notification does mention that where existing shareholding is transferred to a Chinese entity and as a result of which there is a change in beneficial ownership then such transaction shall be liable to be carried out with the approval of the Government of India.

Zomato IPO disclosure

The aforesaid notification had compelled Zomato to make one additional disclosure in its DRHP under the heading Restrictions of Foreign Ownership of Indian Securities, under the said heading Zomato had specifically mentioned the restrictions in place with reference to investors bidding from the countries sharing a land border with India.

Furthermore, any bidder who intended to subscribe to the offer was required to seek prior approval from the Government of India and the said approval was required to be submitted with Zomato and the Registrar of the offer in writing within the offer period.


The restriction imposed by the Government of India on Chinese investments in India is a classic example to understand how geopolitical tensions can lead to setbacks for any business decision. However, we are living in an uncertain world where life is uncertain.

The startup ecosystem definitely rejoiced the grandfathering effect given to the earlier Chinese investments in India. Had there would have been the arbitrary decision by the Government of India to return all the Chinese investment as received to date by the Indian companies, then it would have certainly been no lesser than the apocalypse for startup eco-system in India where the Chinses investments are so deep-rooted.

The Government of India intended to close all routes of foreign investment for the neighbouring countries, but the amendment relates only to the provisions of FDI, which is among one of the routes for receiving foreign funds in India. However, the alternative routes such as FPI, AIF, REITs, InvITs, etc. are not touched upon by the Government of India.

Therefore, in view of above it can be concluded that the Government of India intended to close all route of foreign investment from neighbouring countries but in view to avoid massive repercussions associated with the FPI and various funds those regulated by SEBI like AIF, REITs, and InvITs, unless the where the ultimate beneficial owner of the said funds in citizen or entity associated with a neighbouring country, the Government of India did not touch upon to block investments from such routes.

Finally, it can be stated that from Zomato’s perspective the amendment to FDI rules was a sharp googly, in the mid of circumstances where it was planning to go public.



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