Homepolitics News

    COVID–19 Impact: Govt tweaks FDI policy to regulate Chinese investments into India

    COVID–19 Impact: Govt tweaks FDI policy to regulate Chinese investments into India

    COVID–19 Impact: Govt tweaks FDI policy to regulate Chinese investments into India
    Profile image

    By CNBCTV18.com Contributor  IST (Updated)

    Mini

    The change in the FDI policy has been largely received as a welcome move except perhaps by the start-up community who will have one source of funding shut off, it has left open some questions.

    Authored by Abhishek Saxena
    Acquisition by Peoples Bank of China (PBOC) of over 1 percent shareholding in one of India's largest housing finance company, the Housing Development Finance Corporation (HDFC) set off a storm in the business community. Alarm bells went off that Indian companies will become easy targets for Chinese investors in the wake of a sharp fall in their valuation because of the COVID-19 pandemic. PBOC's acquisition was not the only trade that took advantage of the crashing stock prices. The Saudi Arabian Monetary Authority (SAMA) also picked up a 0.7 percent stake in HDFC on behalf of the Saudi sovereign wealth fund. One can argue that what PBOC or SAMA did was normal investment activity. Then why did PBOC's stake buy in HDFC cause such a furore?
    Firstly, a central bank buying an equity stake in a commercial entity is uncommon. Moreover, speculation about China's alleged role in the pandemic made the move even more suspicious. Secondly, China's desire for global financial hegemony has been an open secret. China's current forex reserve of over $3.2 trillion, dwarf India's forex reserve of $476.475 billion thereby giving it enough firepower to acquire beaten down Indian companies. Thirdly, China represents one of the fastest-growing sources of foreign direct investment (FDI) in India, especially in Indian start-ups (Alibaba and Tencent have invested in a large number of start-ups). This coupled with the fact that in China the dividing line between the state and the private sector is blurred caused greater concern.
    Paying heed to such concerns and following similar decisions by various other countries, the government of India amended the FDI policy with a view to protecting Indian companies against opportunistic takeovers during the COVID–19 pandemic.
    Under the current FDI policy, a non-resident entity can invest in India except in prohibited sectors/activities under the automatic route i.e. without requiring Government permission. However, a citizen or an entity incorporated in Bangladesh or Pakistan can invest only under the government route, i.e., after obtaining prior government approval, except that a citizen or entity from Pakistan cannot invest in defence, space, atomic energy and prohibited sectors/activities. Per the amendment, any entity or beneficial owner of investment into India or a citizen, based in a country that shares a land border with India can invest only under the government route. Also, the transfer of ownership of any existing or future FDI in an Indian entity, directly or indirectly, resulting in the beneficial ownership falling within the above restriction will require Government approval.
    The objective behind this amendment appears to be to regulate both greenfield and brownfield investments from countries sharing a common border with India and to give the government an ability to examine and approve them on a case-to-case basis. While the amendment doesn’t state it, it is aimed at regulating investments from China as confirmed by Beijing's protest against India's move.
    The amendment is quite broad in its sweep and will apply to acquisition or transfer, whether directly or indirectly, of even one share. However, the amendment doesn’t define beneficial ownership which it seems can be used to circumvent the restriction easily by routing investments through a company in a country other than China which is ultimately owned by a Chinese company or citizen. Unless beneficial ownership is defined to restrict ultimate ownership or control by Chinese companies and citizens the amendment may not achieve its desired purpose. The amendment also does not clarify whether it covers investments from Hong Kong. China and Hong Kong have been considered as separate destinations by the FDI policy even after Hong Kong became part of China.
    While the change in the FDI policy has been largely received as a welcome move except perhaps by the start-up community who will have one source of funding shut off, it has left open some questions. It is unclear how the government will monitor investments that are routed through various shell companies. Estimating the actual investment flows from China and Chinese companies could be difficult because many investments in Indian companies are routed through Hong Kong, Singapore or other third-party countries which don’t share a border with India.
    Further, it is also not clear if this is a temporary arrangement or a permanent change. The amendment will also impact transactions and investments that were at an advanced stage of negotiations or waiting for completion. Government's response to requests for approval post this amendment will hold the clue for its thinking behind this move. Will it reject all proposals or adopt a nuanced approach to reject proposals that it perceives to be a threat to national security or India's strategic interest or involve investment in certain specific sectors.
    -Abhishek Saxena is a Co-founding Partner at Phoenix Legal. The views expressed are personal
    Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
    arrow down

      Most Read

      Market Movers

      View All
      CompanyPriceChng%Chng