Last week, housing finance company HDFC observed 1.01% stakes in the company being bought by the People’s Bank of China.
Due to strict lockdown imposed following the COVID 19 pandemic in India, many companies have come to a halt and their values are plummeting. With this, a number of domestic firms may be vulnerable to “opportunistic takeovers or acquisitions” from foreign players.
To take control of the situation, the central government on Saturday has made prior approval necessary for foreign direct investments from countries that share a land border with India. The move primarily aims at restricting Chinese investments in the country.
The revised policy is aimed at curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.said a press release from the Department of Promotion of Industry and Internal Trade
The statement by the department also said that any transfer of ownership of existing or future FDI in Indian entities to those in restricted countries would also need government approval effectively from date of Foreign Exchange Management Act (FEMA) notification.
Neighboring Countries or China?
The new order allows 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 the land border with India, or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Pakistani investors face further restrictions in requiring government approval for FDI in defence, space, and energy sector as well.
Though India shares border with seven countries, Bangladesh and Pakistan faced the restrictions earlier also. Moreover, the other 4 countries – Afghanistan, Bhutan, Bangladesh, and Myanmar do not account for a significant proportion of FDI in India. Whereas Chinese investments in India increased from $1.6 billion in 2014 to $8 billion in 2017 spanning a wide array of sectors like infrastructure, consumer goods, energy, real estate, automobiles, and significantly in start-up space. Thus the order could be interpreted as a step to curb hostile Chinese investments in domestic firms as govt. focuses on tackling the COVID 19 pandemic.
Does it have a downside?
The lockdown has led many businesses to a position of unsustainability. The IMF’s forecast of global recession worst than the 2009 crisis also adds uncertainty to the future once the COVID 19 pandemic gets controlled. The absence of investors in such a scenario may cause bankruptcy and job losses. Also, the most visible Chinese investments in India are in the Internet space in companies such as Zomato, Swiggy, Bigbasket, etc. The investors are either venture capitalists from off-shore tax havens or listed in the stock exchanges of the US and Hong Kong. This makes it difficult for the govt to attribute nationality to the actual beneficiary.
Moreover, by dismantling the Foreign Investment Promotion Board in 2017, India moved towards ending the FDI regime which blocked the sensitive foreign investments. Reapplying the restrictions puts the government back on a restricted regime.
Response from China:
In response to India’s FDI restrictions, the Chinese Embassy in an official statement said that India’s step goes against the World Trade Organization (WTO) principles. It also said that additional barriers set by the Indian Government violate the non-discrimination principle of WTO. It also is a step against general trend of liberalization and trade facilitation. The official also underlined China’s total investment in India is to the tune of $8 billion in 2019. It had driven key sectors such as telecom, infrastructure, automobile, etc.
The Chinese have maintained that the decisions like incremental buying of HDFC shares are taken by companies according to market conditions. The government has no role to play. They have also warned that new policy is clearly going to hamper future investments from China.
Update on Covid-19 India Outbreak – 19th April’2020
India reported 1,580 new Covid-19 cases taking toll of the total confirmed cases to 17,304 as on 19th April’2020. The positive news for India is jump in the recovered case by 388 with 2,854 recovered cases. The Covid-19 disease has taken 559 deaths in India. The top three states with the most number of cases are Maharashtra(4,200), Delhi(2,003) & Madhya Pradesh(1,743)
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