Also, the government will decide in 60 days on India-China joint ventures in critical segments such as components, advanced batteries, capital goods and rare earth magnets. Chief executives said this offers much-needed clarity and will expedite investments since PN3 applications had been stuck for several months to a year.
The move by the government is aimed primarily at removing a key stumbling block–even a small Chinese stake in an entity called for approval under the PN3, stalling or delaying investments even from Taiwanese or European companies.
“Some sort of Chinese shareholding is there in companies across the world. But that should not be an obstacle, so the beneficial ownership clause has been defined clearly,” an official said. With the threshold having been set at 10%, investments from such entities would be identified as non-Chinese and need not go through PN3 unless they breach that limit. When it comes to direct Chinese investments, the rules are already defined and will continue to be followed. Chinese investments will be taken up by the government on a case-to-case basis but, going forward, even that process will be smoother and faster. Indian contract manufacturing major Dixon’s joint venture with China’s HKC was cleared a few days ago. HKC will hold 26% in the combined entity.
“It’s an intent in the right direction as PN3 applications would often get stuck, taking anywhere between six and 12 months for clearance,” said the chief of a leading homegrown electronic contract manufacturer. “At least now a 60-day timeline for certain sectors will help us to get a clarity on the status and plan ahead accordingly.”
PN3 had required investments from land border countries to obtain prior government approval. This was introduced to prevent opportunistic takeovers of Indian companies during the Covid-19 pandemic, and primarily targeted investments originating from China. Ties between India and China deteriorated after the Galwan clash in June 2020. A senior executive with a leading auto component company said the positive is that it signals an opening up.
“There is a definite timeline of 60 days specified now for investment proposals, so you will not be left hanging. But much more liberalisation is required for investments to flow in,” he said. India on Tuesday approved changes in the FDI policy for investments from border countries to bolster manufacturing of electronic components, capital goods and solar cells. The relaxation was also aimed at increasing FDI flow, access to new technologies, stepping up domestic value addition, expansion of domestic firms and integration with global supply chain.The cabinet chaired by Prime Minister Narendra Modi had amended the existing PN3 policy with the incorporation of definition and criteria for determination of “beneficial owner.” Investors with non-controlling land border country beneficial ownership of up to 10% will be permitted under the automatic route as per the applicable sectoral caps and conditions.
The promoter of a leading electronic contract manufacturer said some of the technology transfer arrangements with Chinese companies might be converted into equity joint ventures. The Chinese could own 26% to 49% equity, a significant enough minority stake, and meet government norms for faster clearance. “There was reluctance from some Chinese companies to enter into equity arrangements due to the long drawn PN3 approval process even when that’s their favoured route. But 60-day clearance may speed up such partnerships,” he said. An auto component industry executive said the amendments have been made purely with an eye to integrate supply chains as imports were going up. “But how many Chinese companies will be willing to invest without a controlling stake is not certain,” he said. China is the largest market for components and technology for India’s electronic manufacturing sector, including smartphones and auto components.
(Additional inputs from Sharmistha Mukherjee)