India changed its Foreign Direct Investment (FDI) rules to curb opportunistic takeovers/ acquisitions of Indian companies amidst the COVID-19 pandemic.
This is clearly a move directed towards China. The pandemic has caused stock markets around the world to collapse. As the share prices of companies are down and they are struggling due to cash-flows issues, Chinese entities have gone on a buying spree. [China was the first country to be hit by the virus and has now resumed some of its manufacturing activity. The rest of the world is still in lockdown.].
Chinese investors are facing a backlash from various countries for looking to buy distressed assets available at cheap prices amidst the pandemic. European countries have recently seen an increase in requests from Chinese firms and funds for buying shares in companies.
Countries like Spain, Germany, Australia, the US, France, and Italy have already tightened their foreign investment rules in certain sectors.
The recent report about the People’s Bank of China (Central Bank of China) increasing its stakes in HDFC Ltd from 0.8 % to 1.01 % has alarmed the Indian Government as well.
Moreover, the Government received a letter from MSMEs who fear possible hostile take-overs from Chinese investors. In recent months, a number of Chinese venture funds like Tencent, Xiaomi, etc are actively looking for opportunities in India.
[Hostile takeover is acquiring significant stakes in a company through the shareholders even if the management of the company is not on-board with the change in ownership]
As per the current FDI rules, investments from a foreign entity (except entities based in Bangladesh and Pakistan) is allowed through the automatic route, that is, without the prior approval of the Government. [ In addition, there are certain sectors/ activities like defense, space, etc in which FDI is totally prohibited]
The Government of India revised the current policy to block the automatic route for countries that share a land border with India. All such investments will require prior approval of the Government.
The countries that share a land border with India are Pakistan, Bangladesh, Bhutan, Nepal, Myanmar, China, and Afghanistan. The Government has steered clear of controversies by not mentioning China directly in its report.
The above restriction is also extended to countries where such entities have ‘beneficial ownership’. Therefore, China will not able to invest indirectly through Hong Kong, Singapore, etc as the restriction has been extended to those entities where Chinese entities have beneficial ownership.
The SEBI has also increased its scrutiny of Foreign Portfolio Investments (FPIs) from certain Asian countries (namely Mongolia, Pakistan, Bhutan, Nepal, Afghanistan, Bangladesh, Myanmar, Taiwan, North Korea, Yemen, and Iran) due to fears that China could be investing in India through these countries. The SEBI wants details of the ultimate beneficiaries of these FPIs.
[Read: What is FDI and FPI?]
India has always been wary of Chinese investments in strategic sectors. The pandemic has pushed the Government to take necessary measures.
Though the increase in HDFC stakes is not really a threat, global trends suggest that the fears are not totally unfounded. Also, China has a history of using a world recession to advance its interest.
A Bloomberg report analyzed data for 678 completed or pending deals in 30 countries since the financial crisis in 2008 and found that Chinese state-backed and private companies have been involved in deals worth at least $255 billion across the European continent. And approximately 360 companies have been taken over.
What is particularly worrying is that even private companies in China have opaque links to the Chinese Government.
China has been increasing its investments in India as well. India refused to sign to its Belt and Road Initiatives (BRI) to protect its sovereignty, but a recent report by Mumbai-based foreign policy think tank Gateway House had said India is already onboard a virtual Chinese belt-and-road.
[Read: What is Belt and Road Initiative (BRI) (previously called OBOR)?]
China has gradually stepped up its investments in the start-up segment in India. India-China Economic and Cultural (ICEC) Council estimates that in the last three years, Chinese and Chinese-origin investors have invested about $3.7 billion (Rs 23,600 crore) into Indian startups. Chinese venture funds like Alibaba, Tencent, and Bytedance have a significant presence in India.
China also has massive investments in popular smartphones (Xiaomi, Vivo, Oppo, OnePlus and Realme) as well as apps that have become integral to our routine. Chinese smartphones have a 72 % share in the Indian market.
China has investments in Tik Tok, Paytm, Byju’s, Oyo, Ola, Delhivery, Zomato, Swiggy, Snap deal, BigBasket, Make my Trip, Flipkart, and many more start-ups and apps.
Research by Gateway house observed that 18 of the 30 Indian unicorns (start-ups with a valuation of over $1 billion) have a Chinese investor. It also identified over 75 companies, with Chinese investors concentrated in e-commerce, fintech, media/social media, aggregation services and logistics. (all critical services)
This raises serious concerns about data protection and privacy. It is a threat to national sovereignty as well.
To conclude, India definitely needs to protect its companies that are vulnerable to hostile take-overs and regulate investments in strategic sectors, but this should not spill on to green-field investments made by the Chinese which are not a security threat. China is the second-largest economy in the world and we cannot afford to discourage investments from the country