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Recent Amendments in FDI Policy and its Impact on India’s relationship with China

Updated: Sep 28, 2020

Protectionism, in relation to international trade law, means a policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors. A similar inference can be drawn for the term, in relation to investment laws i.e. restrictions on foreign investment in the domestic companies to protect opportunistic takeovers but this policy may sometimes lead to considerable growth deceleration.

As per the report published by UNCTAD on January 20, 2020, India was among the top 10 recipients of Foreign Direct Investment in 2019, attracting $49 billion in inflows, which can be calculated as 16% increase from the previous year. Further, it must be noted that cumulative inflow of FDI India over the last two decades is $456.91 billion from which China’s contribution is merely 0.51% of the total inflow. The important thing to be noted here is that more than 50% of abovementioned China’s investment happened over the last 5 years, wherein the automobile, electrical equipment and services sector received the largest share. China has the strongest economy in the Asia Pacific region, and its plan towards global domination is not a secret. In recent times, it has also been argued that China is responsible for the novel coronavirus, which is continuously alleged by the Trump Administration. Furthermore, there have been theories that China is trying to take control of major corporations of different countries, all around the world, in such times when the global economy is facing a massive downfall. It must also be noted that according to CGIT, China has made 37 investments of more than $100 million in different sectors, over the past 5 years, out of which 20 were brownfield investments. All these facts, incomprehension, raise severe doubts in terms of strategic acquisitions or takeovers of domestic Indian corporations by China.

India has a set of regulations which deal with the sectoral caps, standard operating procedures, ministry clearances, etc. for both foreign direct and indirect investment. Regulation 5 of FEMA-20R, November 2017, which deals with permission for investing by a person resident outside India, states that –

a. A person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan cannot purchase capital instruments without the prior Government approval.

b. A person who is 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.

The only reasonable explanation to this restriction over a person who is a resident of, or an entity incorporated in, Bangladesh or Pakistan is Security of the domestic corporations. Contemplating on the global image of these countries, it seems a much necessary step to regulate such investments through Government Route and completely prohibit investment in core sectors of the country.

Amid Covid-19 pandemic, the Government of India, under Note 3 of 2020 issued by Department of Promotion of Industry and Internal Trade, revised its Foreign Direct Investment Policy over fears of the Chinese takeover of Indian firms and it seems fair, considering the global scenario and strategies opted by China for global domination. The amended policy states as follows: -

“An entity situated in a country which shares a land border with India, or where the beneficial owner of investment into India is situated in or is a citizen of any such country, is inter alia permitted to invest in Indian entities only under the government approval route. Further, any transfer of ownership of any existing or future foreign direct investment (FDI) in an entity in India (indirectly or indirectly) resulting in the beneficial ownership falling within the purview of the above restrictions, would require the government’s approval. The above restrictions came into effect from April 22 (i.e. the date of notification of the amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“Rules")).”

This major amendment in the FDI Policy of the country seems to be the result of a notification provided by India’s one of the largest housing finance company, HDFC, that Peoples Bank of China has acquired 1% shareholding in HDFC, however, it was later clarified that it already owned 0.8% of its shares but the issue was severe due to its possible future implications. The intention behind this amendment is to regulate both greenfield and brownfield investments from countries sharing borders with India and allow the government to scrutinize such investments. Although this amendment does not specify to regulate Chinese investment yet it certainly appears to be doing the same because Bangladesh & Pakistan were already regulated and the other countries are not making significant moves for such a consideration.

This gamble of protectionism may hurt India’s FDI inflow from China on a massive scale. It must also be considered that some of India’s home home-grown giants have huge investments from Chinese firms, for instance, start-ups like Paytm, Swiggy, Ola, Big Basket and Zomato are supported by leading Chinese investors such as Tencent and Alibaba. Keeping in mind the rapid growth in investments from China in the past 5 years, many Chinese firms are concerned about their future projects and relationships in automobile, electrical equipment and service sector which may force such Indian companies in liquidation.

Through this amendment, the Government of India is only trying to keep track of all the inflows from unregulated investors which may use the coronavirus distraction for opportunistic takeovers which will lead to huge economic implications in the post-Covid19 era.

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