India may allow low threshold for beneficial owner under the new FDI rule

New Delhi: India may prescribe a low threshold for beneficial ownership under the foreign direct investment (FDI) policy, which was recently amended to require prior government approval for investments originating from China and other neighbouring countries.

Policymakers have deliberated both a 25 per cent and a 10 per cent limit but are veering around to the lower one. A final call will be taken at the highest level of government, officials said. The 10 per cent limit is consistent with the definition of beneficial ownership in the Companies Act.

The Department for Promotion of Industry and Internal Trade (DPIIT) has already held inter-ministerial consultations as well as discussions with other stakeholders. Cabinet approval may be sought for the final proposal, a government official familiar with the deliberations told ET.


The lower limit will ensure that while small and financial investments will not face scrutiny, significant investments from China and other countries covered by the new regime will face checks.

On April 18, India tightened its FDI policy for countries with which it shares a land border, putting investments from them on the approval route. This change meant that any direct investment from Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan and Afghanistan required government clearance. The restrictions also covered FDI routed via entities set up in other jurisdictions.

The FDI policy, however, does not prescribe any investment threshold for such approval, implying that a project involving even small amounts would require approval. Moreover, it could also cover investment by venture capital and private equity investors if their funds in turn had Chinese involvement.

A defined beneficial ownership threshold will exempt investments below that level from scrutiny. Investors have so far relied upon definitions for beneficial ownership in other Acts. The Companies Act defines significant beneficial owner as an entity that holds indirectly, or together with any direct holding, not less than 10 per cent of the shares or voting rights in shares or has a right to exercise significant influence or control in any manner other than direct holding alone.

Under the Prevention of Money Laundering Act (PMLA), it is defined as controlling ownership interest in a company of more than 2 per cent of shares and 15 per cent in case of a partnership. A Department of Expenditure order on July 24 imposing restrictions on bidders for government procurement pegged beneficial ownership at a 25 per cent threshold.

The DPIIT, in the press note issued on April 18, said the FDI policy review was aimed at "curbing opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic".