Amendments in India's FDI Policy: A Potential Indo-China Economic War

Leading Chinese Companies in India

An already declining Indian Economy has been badly affected by the ongoing COVID-19 pandemic crisis. In the third quarter of the previous fiscal year (2019-20) the growth rate was at a six year low rate of 4.7%. Indian stock markets are currently witnessing one of the worst phases with a twofold shock – a.) Global pandemic of COVID-19 and b.) the prevailing economic slowdown. There has been a decline in investment and overall consumption demand and as a result a lot of measures have been taken by the Indian government to bring back the economy on growth track.

FDI Policy Change

The Government of India has reviewed the current Foreign Direct Investment(FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic. There have been significant changes made by the government in view of the current situation and strategies followed by other countries like – Germany, Italy and Australia for creating barriers to takeovers and acquisitions by big economies like China.

Current Policy

As per the current policy …

A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited (such as lottery, chit funds etc.). However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

                                    

Revised Policy

As per the revised policy …

a.) 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. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

b.) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.

The above decision will take effect from the date of FEMA (Foreign Exchange Management Act) notification.


Analysis of the Revised Policy


The Motive

According to this move, Indian government wants Indian promoters to retain operating control over the company and prevent any further acquisitions by neighbouring countries. It seems that the move by Indian government is in line with the global trend. Every country is aware about China’s practices and strategic backdoor acquisitions that happened in the past creating widespread panic across the global economies. It is also being believed that the spread of coronavirus across the globe is caused by China itself. India’s economic partner and economic super power United States has also planned to block all sort of trades from China.

India has shown its desperation for foreign investments in the past and at the same time wants to restrict acquisitions by these firms is quite contradictory. This gives us an impression that the move has been rushed with the ongoing trend.

The Associated Risks

China: A Leading Investor in Startups

In the past 5 years, China has invested close to around $4 billion in Indian Startups. 18 of the 30 unicorns startups are funded by Chinese companies and investors. Many of the Indian sectors are currently dominated by Chinese brands such as – TikTok, Oppo and Xiaomi. Alibaba, Tencent and ByteDance have invested billions of dollars in Indian startups. A blocking move by the government might affect the Indian startups further and lead to a loss of thousands of jobs in addition to the current unemployment the Indian job market.

Cash Crunch

At the current times, Indian corporates are facing cash crunch and with increasing NPAs the need for foreign investments has grown to higher levels. With this policy Indian government wants to bring Chinese control over Indian economy to as low as possible.

Trade Deficit

India has already around $55 billion trade deficit with China and the same could have been reduced by the way of investments made by Chinese companies and investors in India. Facing backlash from other countries Chinese companies might be looking for investment avenues and large market like India and this could be an opportunity to attract huge investments.

Depleting Value to Indian Firms

The major threat for Indian companies and small firms is not about Chinese investments but the exports made by China. With India’s lower capabilities in capital formation the net effect will be lesser number of potential buyers in the Indian market resulting in weakening the economy and lowering the value of Indian firms that need immediate capital infusions.