In a move to curb hostile and opportunistic takeover of Indian conglomerates at a time of falling share prices due to the outbreak of coronavirus pandemic, the Indian Government has stepped in and introduced stricter FDI norms for entities or individuals of a country that shares a land border with India.
The move is seen as a counter to block deep-pocketed Chinese entities from advancing its economic print further in the country. On Friday, India’s Ministry of Commerce and Industry moved a notification amending its Foreign Direct Investment (FDI) policy that restricted foreign investment from entities of countries that shares a land-border with India from investing without prior Government approval.
The development comes in the backdrop of the People’s Bank of China buying an additional equity stake in India’s largest private home lender Housing Development Finance Corporation (HDFC). Various sections of Indian incorporation had warned the Central Government about increasing Chinese investments in vulnerable Indian companies.
Earlier this week, several European countries too tightened their FDI norms to prevent Chinese firms from taking over. Countries like Italy, Spain, and Germany that are reeling under the coronavirus outbreak tightened their FDI policy to prevent Chinese entities from taking over at a time of slump in economic activities caused by the pandemic that first emerged in Wuhan, China.
Even the United States and Japan have started monitoring and scrutinizing Chinese investments in the country.
According to a press note issued on April 17 by the Department for Promotion of Industry and Internal Trade (DPIIT), the Ministry of Commerce and Industry of India said, “Government has reviewed the FDI policy for curbing opportunistic takeovers or acquisitions of Indian companies due to the Covid-19 pandemic.
A non-resident entity can invest in India, subject to the FDI policy except those sectors/activities which are prohibited. However, an entity of a country that shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
Further, a citizen of Pakistan or Bangladesh or an entity incorporated in Pakistan or Bangladesh can invest, only under the Government route in sectors/activities other than defense, space, atomic energy and sectors/activities prohibited for foreign investment.
In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the mentioned sectors, such subsequent change in beneficial ownership will also require Government approval.”
The amendment is clearly aimed at targeting Chinese investments as economic inflows into India from Pakistan and Bangladesh already require Government approval while cash inflows from other the neighbouring countries such as Afghanistan, Myanmar, Nepal, and Bhutan are insignificant to deem them as financial threats.
The amendment is to come into effect from the date of notification under the Foreign Exchange Management Act.
Even India’s financial market regulator Securities Exchange Board of India (SEBI), had also scrutinized equity transactions into Indian firms from Chinese entities since the assets are being purchased at lower valuations as a result of a slump in economic activity due to coronavirus pandemic.
Several Chinese entities such as Tencent and e-commerce behemoth Alibaba already own stakes in India’s two major online companies Flipkart and Paytm.
As per the India-China Economic and Cultural Council citing the Gateway House, Chinese venture capitalists have parked around $4 billion of greenfield investments in Indian start-ups. Almost 18 out of the 30 Indian unicorns are funded by Chinese organizations.