Tighter FDI rules: China protests India measures; Niti Aayog chief says start-ups not to suffer

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Published: April 21, 2020 4:00:29 AM

Prior to the move, all FDI proposals from only Pakistan and Bangladesh were required to be cleared by the government.

Over 90% of the country's FDI comes through the automatic route.Over 90% of the country’s FDI comes through the automatic route.

Two days after India tightened its foreign direct investment (FDI) policy for bordering countries to curb “opportunistic takeovers/acquisitions” of its firms hit hard by the pandemic, China on Monday said the move violates the WTO’s principle of non-discrimination and is against the general trend of free trade.

However, in an interview to CNBC-TV18, Niti Aayog chief executive Amitabh Kant downplayed the criticism, saying the government circular relates to only FDI and is unlikely to impact Chinese investments in Indian start-ups. Given the crash in valuations of liquidity-starved domestic companies in the wake of the Covid-19 outbreak, the government is required to do some due diligence on FDI proposals for their takeover, Kant said, explaining the rationale behind the decision. Even the US and the EU have initiated similar steps, he said. Greenfield investments from China won’t face any trouble and that Chinese manufacturers in India must use the country as a base for exports, he added.

As such, FDI accounted for less than 30% of Chinese investments worth $8 billion in India until December 2019.

According to a DPIIT press note on April 18, any FDI by investors from the bordering countries will now require prior government clearance, even if foreign investments for that sector are placed under the automatic route. Importantly, the notification also covers any transfer of investments or future FDI resulting in beneficial ownership falling with firms from the bordering nations.

Prior to the move, all FDI proposals from only Pakistan and Bangladesh were required to be cleared by the government. Over 90% of the country’s FDI comes through the automatic route.

On Monday, a Chinese embassy spokesperson in New Delhi said: “We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment.”

His statement also highlighted that as of December 2019, China’s cumulative investment in India has exceeded $8 billion, “far more than the total investments of India’s other border-sharing countries”.

It, however, didn’t point out that FDI inflows from China have remained meagre and its venture investments in Indian start-ups, in any case, are unaffected by the latest FDI circular.

Between April 2000 and December 2019, FDI from China stood at just $2.34 billion, or only 0.51% of India’s cumulative inflows during this period, according to the DPIIT data. This is despite the fact that 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. 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, too, China made up for close to a third of India’s overall goods trade deficit.

Also, according to a recent report by researchers Amit Bhandari and Aashna Agarwal, China has entered the Indian market through venture investments in start-ups and penetrated the online ecosystem with its popular smartphones and their applications. 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.”

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

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