In a major policy move to control growing Chinese investments in India, the government, in April 2020, notified new rules, that are aimed at restricting opportunistic takeovers of Indian companies in the wake of COVID-19 pandemic, as per the press release from the Department for Promotion of Industry and Internal Trade. As per the revised Foreign Direct Investment (FDI) policy, the countries which share a land boundary with India will be required to seek prior approval of government for making investments in India as was previously required for Bangladesh and Pakistan.
New Policy: Rules and Regulations
The policy clearly states ‘A non-resident entity can invest in India, subject to the FDI policy except in those sectors/activities which are prohibited. If an entity of a country shares land border with India or the investor is located or is a citizen of any such country, the person or country would be allowed to invest only under the government route. These revised rules are mandatory only for countries sharing land borders with India—Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh, and Myanmar. Except for these countries, investors from other countries just need to inform the RBI after a transaction and are not required to get prior approval from the authorities concerned. In case of Pakistan, there are further restrictions for getting approval for FDI in sectors like defence, space, and atomic energy.
This development is a timely decision in view of the fact that the lockdown imposed in the wake of COVID-19 pandemic has resulted in many Indian businesses being put to a halt; in such a scenario, there are opportunistic foreign players who can take advantage of such vulnerable domestic firms by takeovers or acquisitions. Similarly, the new policy would put restrictions portfolio investment like People’s on Bank of China’s 1.01 per cent stake holding in housing finance company, HDFC. The decision will also impact investments made by Chinese companies in India through other countries like Singapore and Mauritius.
Any further sale of FDI to investors in neighbouring countries, would have to follow new policy with each subsequent change in ownership through transfer of investment to requiring government’s approval.
A transfer of ownership of any existing or future FDI in an Indian entity to those in restricted countries would also require prior government’s approval.
Significance of the move
The move is quite significant in the current situation in which China is aggressively following the path of expanding its economic footprint in Indian business arena. According to a Brookings India report, Chinese investment in India increased from $1.6 billion in 2014 to $ 8 billion in 2017. As per estimates by Brookings report, titled, Following the Money: China Inc’s Growing Stake in India–China Relations, in March 2020, the total current and planned Chinese investment in India crossed $26 billion. The COVID-19 pandemic has given China the opportunity to further expand its economic footprint in India.
China has so far invested in India in various sectors. As per the Industrial and Commercial Bank of China’s Mumbai branch, manufacturing sector (42 per cent); and infrastructure and others in telecom, petrochemicals, software and IT (25 per cent). Besides, energy—where three out of four Indian power plants use Chinese equipment, automobiles, real estate and consumer goods like mobile phone—makes major Chinese investment. The most underestimated Chinese investment seems to be in the technology start-ups. As per the Gateway House think tank report in February 2020, Chinese giants like Alibaba and Tencent have funded at least 92 Indian start-ups.
Other countries like Italy and Spain have also taken similar decisions to protect their vulnerable domestic firms from falling into this trap.
However, China has raised its objection to revised FDI policy of India asserting that such barriers by India are in violation of WTO’s principle of non-discrimination as well as liberalisation and facilitation of trade and investment.
Analysis of the Move
Analysts are of the view that the curbs on Chinese investment will impact sectors like consumer electronics like mobiles and its various components. Prof. Biswajit Dhar, Centre for Economic Studies and Planning, JNU, says, this move is based on fears that the Chinese will dominate the post-COVID-19 world. The Chinese have already got a significant headstart over other countries. Manufacturing activities have kickstarted. Chinese firms can target low hanging fruits. Many Indian companies will be up for grabs including the mid-sized ones. China is likely to dominate trade in the coming years and India cannot do anything about it, except to restrict Chinese investments.