Curtailing Foreign Direct Investment in India

The Government of India has recently amended its Foreign Direct Investment Policy (“FDI Policy“) and barred automatic investment into India by its neighbouring countries. A press release[1] dated April 17th, 2020, (“Press Release“) issued by the Department for Promotion of Industry and Internal Trade (DPIIT) has revised the FDI Policy to curb opportunistic takeovers or acquisitions of Indian companies in the aftermath of the novel coronavirus outbreak and the looming economic crisis.

Present Position

Prior to the amendment, a non-resident entity could invest in India, subject to the FDI Policy except in certain reserved sectors. However, a citizen of Bangladesh or an entity incorporated in Bangladesh could invest only under the Government route. Whereas a citizen of Pakistan or an entity incorporated in Pakistan could invest in India, but only with prior Government approval in sectors excluding defence, space, atomic energy or any other sensitive/ prohibited sectors.

Amendment of FDI Policy

The revised FDI Policy requires the Government’s approval for any FDI made by an entity of any country which shares a land border with India or where the beneficial owner of such an investment is residing in or is a citizen of any such country. India shares its land borders with Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, China and Afghanistan (“Neighbours“). In other words, as per the new amendment, FDI from these Neighbouring countries requires an approval from the Government of India (and cannot go down the automatic route), which will subsequently be able to monitor the extent of these investments and provide its approval on a case to case basis. Two senior Government officials have, subsequent to the Press Release clarified that this restriction shall also apply to Hongkong, which is a Special Administrative Region of China[2].

Additionally, the revised FDI Policy retains existing clauses that state that any citizen of Pakistan or an entity incorporated in Pakistan can invest in India only after securing prior Government approval but not in the defence, space, atomic energy or any other restricted sector. The amendment also addresses situations involving a proposed transfer of ownership of any existing or future FDI in an Indian entity benefitting an entity or citizen of a country sharing land border with India. The revised FDI Policy states that such a transfer would also require Government approval.

On the heels of this decision of the Government to revise the FDI Policy, was the Securities and Exchange Board of India’s (SEBI) request for data from custodians, with an aim to analyse investment from China, Hongkong and 11 other Asian countries[3].

What Triggered the Amendment?

In 1991, the Narasimha Rao government ushered in a slew of new reforms and revolutionised the economy through the revolutionary Liberalisation, Privatisation and Globalisation (LPG) regime[4]. This marked the beginning of the end of many public sector monopolies with the Government taking a huge step forward by abolishing licensing control on private investment. Since then, India has been on a constant trajectory of liberalizing its FDI Policy. The recent amendment places obvious hindrances in the path of liberalisation reform which seeks to reduce Government control beyond the bare minimum.

However, in the wake of the Covid-19 pandemic and its looming economic implications, India has vide this amendment taken a protective stand towards homegrown and Indian entities from Neighbouring investment. This legislation is in line with the protectionist stances taken by USA & China throughout the brewing trade war last year.

As of December 2019, China’s cumulative investment in India has exceeded 8 billion US dollars, far more than the total investments of India’s other border-sharing countries[5]. Earlier this month, it was reported that China’s central bank, i.e., People’s Bank of China (PBoC) raised its stake in Housing Development Finance Corp. Ltd (HDFC) from 0.8% to 1.01% in the March quarter. This move has raised grave concerns regarding hostile takeovers of marquee Indian companies that have lost significant value in the recent market meltdown by Neighbouring countries such as China.

Looking into history, and using the example of China’s acquisition of the Sri Lankan port – Hambantota Port. The port was built with the assistance of money lent to Sri Lanka by China over several years. Struggling to repay the debt, the Sri Lankan government after months of negotiations with the Chinese, eventually had to hand over the port as well as the surrounding land to China for 99 years. This is not the only port that China has a stake in. The Chinese government has a stake in ports in Pakistan (as well as the proposed China Pakistan Economic Corridor), Myanmar and several other countries in as well as outside the Indian subcontinent[6], thus being perceived as a threat to India.

Implications of the Amendment

Any fresh investment from China or any of India’s Neighbours would now require a Government nod which will lengthen the time required for concluding a transaction. This may cause Indian entities to prefer investments from the US or Europe or other parts of the world.

However, this would also mean that companies with existing Chinese FDI may face severe problems. Chinese companies such as Alibaba, Tencent & Xiaomi are heavily invested in India and several of India Inc.’s big names such as PayTm, Big Basket, Zomato, Ola have large chunks of Chinese investments. 18 out of 30 Indian unicorns are Chinese funded[7], and the clamp down on Chinese investment will have implications on future investments. In a market that is already struggling with a severe liquidity crunch, this amendment will exacerbate the cash crisis further.

While start-ups and other debt-ridden entities in India may be wary of the Government’s move to change the FDI Policy in an attempt to restrict investment from China, the move could prove beneficial in the long run and protect the Indian economy from opportunistic takeovers. The decision of the Government has been taken as a measure to protect India Inc. as well as address the concerns of many who were worried that Indian companies could be susceptible to a take over from foreign investors, as their valuations have been hit given the correction in equity markets because of the pandemic and the consequent lockdown.

In a latest development, the spokesperson of the Chinese Embassy in India, Counselor Ji Rong stated that “The additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment. More importantly, they do not conform to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open. Companies make choices based on market principles. We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment. [8]