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What is India's New FDI Policy Towards Chinese Investments?

Editor, TRANSFIN.
May 13, 2020 6:15 AM 5 min read
Editorial

Indian companies are reeling under the COVID-19 recession and the Government is apprehensive that Chinese firms could exploit this situation and trap them in unfavourable deals and opportunistic takeovers.

To avoid this, the Centre recently came out with new amendments to its Foreign Direct Investment (FDI) policy that seemingly target Chinese firms by mandating screening of foreign investments from certain countries before approval.

What exactly does this new policy entail? Why is India concerned about Beijing’s intentions? And how do the new norms feature in the larger picture of the pandemic and India’s trade ambitions? Let’s dive right in!

 

 

How Does FDI Work in India?

Let’s briefly get back to the basics. There are two main entry routes for foreign investors (hint: Ctrl+F “Entry Routes for Investment” to land on Page 44 Section 3.4 for a deeper dive) looking to invest in Indian sectors - Automatic route and Government route.

In the former, neither the foreign investor nor the domestic company require any approval from the Government to complete the investment. The investor just has to inform the RBI after the investment is made.

Under the Government route, prior approval of the respective Ministry/Department is required.

There are also some sectors that follow a Government + Automatic route. And there are nine sectors where FDI is entirely prohibited (like lottery, gambling, real estate, cigarette manufacturing etc.).

 

What is India’s New FDI Policy?

The new FDI rules (official circular here) affect India’s neighbours i.e. ones which share a land border with us - China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan. 

The changes mandate “prior approval” for foreign investments from these countries and are aimed at curbing “opportunistic takeovers” of Indian firms under strain. Earlier, such restrictions only applied to two countries - Pakistan and Bangladesh.

The new norms also apply to “beneficial ownership” i.e. When a company is not based out of the country in question but its owner is a citizen or resident of that country. (But the Government may set a 10% cap for beneficial ownership. The 10% threshold would be in line with the rules for significant beneficial owners under the Companies Act, 2013.)

 

How Will the New FDI Rules Affect Investments?

Approval timelines for fresh investments by the above-mentioned countries could increase by six-eight months from the present six-eight weeks. This would be in addition to heightened Government scrutiny, which in turn could perhaps elevate the approval criteria quite meaningfully.

 

What Sparked the Amendments?

They seem to have been sparked by the revelation that the People’s Bank of China (PBoC) had decided to up its stake in HDFC Bank to over 1%. (The PBoC was a shareholder before this too - it owned as much as 0.8% as of March 2019. But once its ownership crossed 1%, it was required by law to reveal its stake.)

This news came out on April 13th and the Department for Promotion of Industry and Internal Trade (DPIIT) came out with a circular on the new rules days later on April 17th.

The time difference may make it seem like an ad hoc decision, but it was likely a long time coming.

 

How Much is China’s FDI in India?

Unfortunately, there’s no definitive answer to this question. Official data varies wildly - DPIIT data says Chinese investment in India was a mere $6.5bn between 2000 and 2019. That’s barely 0.5% of the net FDI inflow during this period. Chinese statistics, meanwhile, say this number is $8bn.

The real number is likely to be many times higher. This discrepancy is because a lot of Chinese investments are routed through other destinations like Singapore and Mauritius. The situation is further complicated as some investments are from funds whose links to Chinese entities are difficult to ascertain and by the difficulty in confirming whether stated investments by Chinese companies have materialised to the fullest extent.

What might the extent of Chinese FDI be? According to Brookings, if you took into account both the existing and planned Chinese investments in India, the amount could stand at $26bn, with $15bn in pledged but unapproved projects. And this is but a conservative estimate.

 

Do the New FDI Rules Have Any Precedent?

Yes. And no.

We’ve seen many countries over the past few weeks tightening the screws on hostile foreign takeovers. The European Union (EU) recently issued guidelines to protect "critical assets from foreign investment". Italy, Germany, Canada, Australia and Spain have announced measures of their own, which include, as in India, requiring government authorisation for foreign investment.

Analysts have argued this protectionist tilt was necessitated by Beijing’s actions. Chinese firms, many of them state-owned, are reportedly looking for discounted deals in Europe, where businesses are capital-starved because of the COVID-19 pandemic. 

China seems to follow a pattern of luring crisis-hit foreign firms with cheap deals, something that is called “opportunistic buying”. For example, in 2010 Chinese investment in the EU was about $6.5bn. Then the EU suffered a debt crisis and by the end of 2012, Chinese investment had quadrupled to c. $29bn.

But speaking of India’s trade history specifically, the actions of April 17th don’t have precedent. Restrictions on FDI have been imposed on certain sectors before this, but not on countries.

 

How Has China Responded?

Unsurprisingly, Beijing is not happy with the new FDI norms and has called them “discriminatory” and in “violation of World Trade Organisation’s principles”. 

India has maintained that the amendments don’t prohibit investments but just change the approval route for them. Nonetheless, following concerns raised by China, India is also reportedly planning to fast-track some investment proposals from neighbouring countries. 

 

The Big Picture

India’s new FDI norms can be understood when seen through three lenses.

Firstly, the coronavirus. The pandemic and the resulting nationwide lockdown have greatly damaged the Indian economy. All companies, big and small, have taken a hit. Recovery will be long and painful, and many businesses may not even jump back to pre-COVID levels. As such, firms are vulnerable right now, and they could be exploited by capital-rich Chinese investors.

Secondly, India’s relations with China. It’s no secret that Sino-Indian ties were never rosy. Besides trade frictions, India resents China’s close ties with Pakistan and its diplomatic and economic inroads into its backyard in Sri Lanka, Nepal and Bhutan. Then there are the decades-long border issues vis-à-vis Aksai Chin and Arunachal Pradesh. 

And no amount of diplomatic overreach has pacified the distrust between the world’s two most populous nations. Perhaps fittingly, the term “Wuhan Spirit” which was once used to signify an expected rejuvenation of India-China ties now invokes something else altogether.

Thirdly and finally, India’s global ambitions. Global supply chains could be in the process of being entirely remade. Years of trade conflict between the US and China had cajoled global firms to consider moving base from China, the “world’s factory”. The COVID-19 pandemic has seemingly necessitated this shift. Renewed hostility between Beijing and Washington, which accuses China of covering up the initial coronavirus outbreak in Wuhan, has accelerated this push. 

This comes at an opportune time for India - not only because of its faltering economy but also because of its target to grow its manufacturing sector to 25% of GDP by 2022. Last month, the Government reportedly reached out to over 1,000 US companies looking to move out of China to offer them land, concessions and other incentives. Some sectors that were prioritised include medical equipment supply, food processing, textiles, leather, auto part makers and smartphone manufacturers.

FIN.

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