Chinese checker: Stricter FDI rules for bordering nations

By: |
April 19, 2020 3:53 AM

No automatic approval; move seen to curb opportunistic takeovers.

The FDI inflows from China have remained meagre, despite some improvement in recent years.The FDI inflows from China have remained meagre, despite some improvement in recent years.

As the COVID-19 outbreak has severely hit the liquidity position of many domestic firms, making them easy prey for cash-rich Chinese investors, the government has tightened its foreign direct investment (FDI) policy to curb “opportunistic takeovers/acquisitions” by entities in bordering nations.

Any FDI proposal by investors from the bordering countries will now require government clearance, even if foreign investments for that sector are placed under the automatic route. Prior to the move, all FDI proposals from only Pakistan and Bangladesh were required to be cleared by the government. FDI from Pakistan is also prohibited in certain sensitive sectors, including defence, space and atomic energy. Over 90% of the country’s FDI comes through the automatic route.

The department for the promotion of industry and internal trade (DPIIT) on Saturday said: “A non-resident entity can invest in India, subject to the FDI policy, except in those sectors/activities which are prohibited. However, an entity of a country, which 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.” Analysts say the move is in sync with the steps taken by the EU and Australia after the novel coronavirus outbreak.

Atul Pandey, partner at Khaitan & Co, said Sebi has also begun reviewing FPI investments from Chinese funds over possible takeover concerns. Importantly, the notification also covers any transfer of investments/future FDI resulting in beneficial ownership falling with Chinese firms. However, the mode of computation of ‘beneficial ownership’ is still unclear, he added.

The FDI inflows from China have remained meagre, despite some improvement in recent years. China has in the past pledged to step up investments in India, following New Delhi’s calls that Beijing trim its massive trade surplus with this country. But large investments barely flowed in. In fact, between April 2000 and December 2019, FDI from China stood at just $2.34 billion, or only 0.51% of the cumulative inflows during this period, according to the DPIIT data. But India’s merchandise trade deficit with China stood at a massive $53.6 billion in FY19, or nearly a third of its total deficit. In the April-January period of the last fiscal, China made up for close to a third of India’s overall goods trade deficit.

However, given that many Indian firms, which were already under stress even before the pandemic, can potentially turn insolvent now, the government worries that Chinese investors could ramp up acquisition efforts, taking undue advantage of a drastic drop in these firms’ valuations.

Interestingly, Congress leader Rahul Gandhi recently called on the government to stop foreign interests from taking over weak Indian companies, hit by the pandemic.

Companies in the US and the EU, which account for a sizeable chunk of the FDI inflows into India, are already reeling under the impact of the COVID-19 crisis. So chances of opportunistic acquisition bids by them are limited.

India’s FDI inflows (equity) rose 10% year-on-year in the first three quarters of the last fiscal to $33.5 billion.

However, China has entered the Indian market through venture investments in start-ups and penetrated the online ecosystem with its popular smartphones and their applications. According to a report by researchers Amit Bhandari and Aashna Agarwal, Chinese tech investors have put an estimated $4 billion into Indian start-ups. Over the five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded. “TikTok, the video app, has 200 million subscribers and has overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the US penetration of Facebook, Amazon and Google in India. Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72% share, leaving Samsung and Apple behind.”

Vikram Doshi, partner (Tax & Regulatory) at PwC India, said the pandemic will mainly impact businesses that are highly leveraged. “This press note is an attempt to place a check and give the government an opportunity to review such takeovers and investments coming into India from specific jurisdictions.”

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