In order to ensure that foreign companies do not take advantage of the economic slowdown resulting from the global coronavirus pandemic, the central government on Saturday revised its Foreign Direct Investment (FDI) policy.
According to the new policy, "an entity of a country that shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country can invest only under the government route".
Simply put, any country that shares a land border with India can only invest via the centralised route; direct investments will not be applicable for them. This list of countries includes China.
The nations sharing land border with India include Bangladesh, China, Pakistan, Bhutan, Nepal and Myanmar.
Earlier, similar restrictions were applicable to FDI investments from Pakistan and Bangladesh.
The decision was notified by the Department for Promotion of Industry and Internal Trade (DPIIT).
The fresh policy states that government permission will also be needed to transfer ownership of Indian companies arising out of FDI investments from neighbouring countries.
Experts suggest that the move may have been made keeping China in mind.
Lt Gen (Retired) PC Katoch in an earlier article had pointed out why India needed to be concerned about China's growing investments.
China’s People’s Bank had bought 1.75 crore shares (worth about Rs 3,000 crore) of HDFC Bank between January and March. By March, China had invested more than $26 billion in India, up by more than $24.4 billion since 2014 when its investments were a mere $1.6 billion.
China has funded 30 Indian start-ups with a cumulative investment of about $4 billion -- this despite rhetoric at home about boosting start-ups and MSMEs. Multiple Chinese apps are raking in millions from India. Chinese businessman and former executive chairman of Alibaba Group, Jack Ma, made 40% investment in government-sponsored Paytm when he visited India in 2015.
The decision comes after small and medium industries wrote to the central government fearing possible hostile takeovers from Chinese investors at a time when they are facing survival issues and their valuations have taken a beating amid the COVID-19 crisis.
In a recent letter to the government, small-sized industries wanted the Centre to temporarily halt FDI through the automatic route, which was possible for over 1,000 industries with just 16 sectors, including defence and telecom, requiring government scrutiny.
The new rules say the government has reviewed the Foreign Direct Investment Policy to curb "opportunistic takeovers/acquisitions" of Indian companies due to the current COVID-19 pandemic.
"Citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment," it added.
Nangia Andersen LLP Director Sandeep Jhunjhunwala said Chinese tech investors have put in an estimated $4 billion of greenfield investments into Indian start-ups as per estimates of the India-China Economic and Cultural Council.
"Such is their pace that over the last few years, 18 out of India's 30 unicorns are Chinese-funded. Overall, the time is right for India to safeguard longer-term considerations and protect its technology ecosystem by blocking hostile deals and effectively dealing with the looming challenge posed by Chinese tech companies," he said.
India's decision follows that of other countries enacting laws to protect weaker companies from being taken over by moneyed Chinese firms. The Australian government in March had tightened rules around foreign takeover and investment rules after growing concerns of predatory behaviour by Chinese companies.
Earlier in the month, Germany made it tougher for non-European Union companies to take over private German firms.
Media reports said the Securities and Exchange Board of India (SEBI) had already stepped up vigil against China-based funds amid concerns over possible takeovers by them as deep-pocketed Chinese companies.
As of now, several Chinese venture capital funds are considering buying stakes in Indian start-ups, ranging from those innovating financial and education technology to e-commerce, content, and online classifieds platforms because India’s start-up environment is the third largest in the world and proves to be an exciting bet during the time of a global slowdown.
The Centre's decision to revise the FDI policy also comes after it allocated Rs 10,000 crore as "Fund of Funds", which would soon be approved by the government to buy up to 15% equity in these companies with high-credit rating that want to list on stock exchanges and raise money from the capital markets.
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