China Wall: India Changes FDI Policy to Block Procurement Threat

NEW DELHI: In a decision fraught with geopolitical and economic ramifications, the government on Saturday modified its foreign direct investment (FDI) policy to put a blanket ban on investments through the automatic route by entities from countries that share a border with India. The move is seen as an attempt to avoid the threat of China’s “opportunistic” takeover of Indian companies, whose valuations have been badly affected by the coronavirus pandemic.
The restrictions, which were already in place for investments by Pakistan and Bangladesh, will be extended to entities where Chinese citizens have “beneficial owners” to ensure that restrictions are not circumvented by routing investments through Hong Kong, Singapore or other countries.
Most FDI flows to India are under the automatic route, which means that companies only need to inform the authorities once the investment is made. The latest move signals growing concern within the government that China could try to acquire Indian companies by exploiting its financial vulnerability. The surprising move contrasts with the Modi’s government’s restraint in not joining the global chorus of outrage at China’s attempt to hide the pandemic outbreak in Wuhan, a lapse that has been widely regarded as a major contributor. to the magnitude of the public health emergency that has already claimed more than 1.5 lakh of lives worldwide and has paralyzed economies and markets.

Government sources said there was a real threat from Chinese entities, many of the big ones controlled by the communist rulers in Beijing through a network of opaque links, who moved to take Indian companies that were fine until the pandemic. It made them relatively cheap and tempting targets. The ties are the reason why the security establishment here has viewed China’s investments as a risk.
Government sources said that although the measure has been in process for a while, Covid-19 helped the government make up its mind quickly. The measure coincides with similar barriers erected by other countries such as Germany, Italy, Spain and Australia to block China’s predatory capital.
India’s decision, however, is different in one vital respect. Unlike other cases where the filters are intended for general investment, the Modi government decision is specifically aimed at China since the automatic route was already closed for flows from Pakistan and Bangladesh. The frankness of the government’s decision reflects the seriousness of its concern.
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Sources said the government had explored the option of putting a general ban on foreign investment via the automatic route, but decided not to do so due to the caution of being seen as protectionist and insular. Putting FDI from all countries under the approval path would also have slowed inflows, which are critical at the moment. With the threat that Chinese capital will move and look serious, the authorities decided to be specific by moving away from the caution that has defined New Delhi’s approach to Beijing. Sources said that during the deliberations a school of thought had favored a more nuanced approach, arguing that new investments should be allowed, but the leadership decided to go entirely.
The Indian government measure, approved by the Union Cabinet, comes days after it emerged that the People’s Bank of China increased its stake in HDFC Bank, the country’s largest private lender, to more than 1%. But while the PBOC investment was made through the portfolio investment path, the FDI move is more strategic and aims to block any attempt to restrict entities across the border to acquire significant beneficial interest. Stock market regulator Sebi separately controls investments from China and some other countries.
The latest move by the department for the promotion of industry and internal trade, the agency responsible for FDI policy, will not only affect new investments but also the infusion of capital into existing companies in India, where Chinese entities have equity stakes.
While the title of the press release focuses on acquisitions or opportunistic acquisitions, this may affect increased participation or increased investment in existing Indian companies by existing investors in the specified countries. It will also affect investment from other countries, such as Singapore, if the beneficial owner of the investment is from a specific country, ”said Vikram Doshi, partner for tax and regulatory affairs at consultancy PwC India.
The decision also marks a shift in the Indian government’s position in recent years when it attracted investments from Chinese companies to counter its neighbor’s growing trade deficit. But all these years, New Delhi has been wary of Chinese companies, often discussing ways to block their presence in strategic sectors and locations.
“It is the fear of Chinese domination. The Chinese have already restarted manufacturing when the rest of the world is still dealing with the coronavirus. China has a multi-month advantage over all other major economies and can therefore secure significant benefits. After each crisis in recent years, China has consolidated … the Indian government is trying to avoid acquisitions. Countries need to strengthen their national capacities to meet the Chinese challenge, “said Biswajit Dhar, a professor at Jawaharlal Nehru University and an expert on trade and investment issues.