India toughens FDI rules to reduce threat of Chinese “opportunistic” M&As

20, Apr. 2020

By Atul Ranjan

NEW DELHI, NNA- India has tightened its foreign direct investment policy to ease a growing threat of “opportunistic” acquisitions by Chinese interests during economic fallout from the coronavirus pandemic.

According to a revised FDI policy released Saturday, investments in non-prohibited sectors from countries that share a “land border with India” now need prior government approval. China is among the countries with a land border.

“The government of India has reviewed the extant FDI policy for curbing opportunistic takeovers (and) acquisitions of Indian companies due to the current Covid-19 pandemic,” the Department for Promotion of Industry and Internal Trade said in a press note.

India shares a land border as well with Nepal, Bhutan, Bangladesh, Myanmar, Pakistan and Afghanistan. India had previously required special permission for investments in non-prohibited sectors from Pakistan and Bangladesh.

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The move comes days after the country’s private lender Housing Development Finance Corp. said in a regulatory filing on April 11 that People’s Bank of China, the monetary authority in Beijing, had raised its stake in the lender to 1.01 percent from 0.8 percent earlier.

India’s decision to toughen its rules is aimed at China, experts say. The government seeks to protect struggling local firms from Chinese investors looking to buy such distressed assets, they say.

“What India has tried is to increase market entry barriers for Chinese investment,” said Rajat Kathuria, director and chief executive of the Indian Council for Research on International Economic Relations, a New Delhi-based think tank.

“It’s a risk-averse strategy, which reflects lack of trust in China in the current situation,” Kathuria told NNA in an interview Sunday.

China is recovering from its virus outbreak, the world’s first, while companies throughout India remain closed during a stay-at-home order that’s tentatively due to expire on May 3.

Market valuations of many Indian companies have fallen drastically, said D. K. Aggarwal, president of the lobby group PHD Chamber of Commerce and Industry. He said there’s growing apprehension that Chinese investors might try to take control of those firms.

“We appreciate the government’s move to amend FDI rules which seek to first evaluate the investments coming from our neighboring countries such as China before giving green signal to such investments,” Aggarwal said.

Indian startups heavily funded by Chinese investors may face setbacks, however, he said. As many as 18 of India’s 30 unicorns – startups valued at more than $1 billion – are Chinese-funded, Indian foreign policy think tank Gateway House says. Chinese investors have pumped about $4 billion into Indian startups over the past five years, its report says.

M.D. Nalapat, a columnist and professor of geopolitics at Manipal Academy of Higher Education, however, called it impractical for the state to monitor and regulate Chinese investment.

“Now if any Chinese company really wants to invest in India, they can do through backdoors… through tax havens etc.,” Nalapat told NNA on Sunday. “In India you can have funds coming in, for example, via participatory notes (P-notes) which are completely untraceable at source.”

India received FDI worth $2.34 billion from China between April 2000 and December last year, which is just 0.51 per cent of the total FDI inflow into the country during that period, the government said. Investments from other border states came to significantly less. Myanmar contributed $8.97 million, Nepal $3.25 million, Afghanistan $2.44 million and Bangladesh just $80,000. Nothing was recorded from Bhutan or Pakistan.