Facebook seeks legal advice on $5.7-billion investment in Jio Platforms

Social media giant has some investors from China, wants clarity on beneficial ownership norms

Facebook (FB), ahead of its $5.7-billion investment in Jio Platforms, has sought legal advice pertaining to India’s new foreign direct investment (FDI) policy towards neighbouring countries, particularly China and Hong Kong. While the social media giant is founded and headquartered in the US, being a public-listed company it has investment from several funds based out of China and Hong Kong.

Sources say the Mark Zuckerberg-led company wants to ensure there are no issues in its investment in the subsidiary of Reliance Industries.

It has roped in one of the Big Four consultancy firms to advise it on how the new “beneficial ownership” norms would apply to the proposed investment in Jio, said two people privy to the matter.

In April, FB announced it would pick up 9.99 per cent in Jio Platforms for Rs 43,574 crore ($5.7 billion). After FB, nine other global investment firms followed in taking a stake in the digital services company. FB and Reliance Industries did not answer the queries sent to them on Monday. 

 

Under the amended FDI policy, notified in April, prior approval is required from the government for any foreign investment or acquisition of an Indian company, where the acquirer or the “beneficial owner” shares land borders with India. Further, the new policy states prior approval is required even if a single Chinese firm invests in an overseas entity that wishes to invest in India. FB has shareholders, including hedge funds and financial institutions, in Hong Kong and mainland China.

Sources say the onus is on investors, not on the companies they are investing in, to get approval and settle formalities of jurisdiction. In this case, if the norms apply to them, FB requires approval from the ministries concerned in India. 

However, legal experts say the new FDI policy is ambiguous, particularly with regard to treating indirect investment from the neighbouring countries.

“The new policy needs clarity on various matters, particularly the definition of beneficial ownership, because there is no such defined criterion in the Foreign Exchange Management Act. Several companies and industry bodies have approached the government, seeking clarity on the format of reporting and disclosures to be made.

Due to there being no standard approach, buyers and sellers end up assessing themselve6s what constitutes adequate and appropriate disclosures, thereby relying on undertakings and contractual indemnities to protect themselves from penalties if it is later found that proceeding with the deal without approval had been an infringement, said a legal expert. There are about 2,700 institutional investors invested in the FB stock. Of those, a few are based in China and Hong Kong. However, none of them exercises any control over the company. 

The amendment in the policy was aimed to protect domestic companies from hostile takeover by “opportunistic foreign firms” as the pandemic rages.