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Indian Government’s FDI policy during COVID pandemic: Taming the Hidden Dragon

Chinese Opportunism

While the world economy is suffering under the impact of COVID crisis, Indian organizations have also been hit hard. During Jan-March, Sensex lost 25 per cent while 50-share Nifty closed down by 26 per cent. HDFC shares fell nearly 40 per cent this year from Rs 2,493 to Rs 1,499 in the first week of April.

Government and many business leaders are worried that China may take advantage of the economic slump, to raise its stakes in Indian companies.

Following this decline, People’s Bank of China raised its stake in HDFC and bought Rs 3,000 crore of HDFC Bank shares. According to Economic Times, China wants to buy Indian assets following decline in valuation of Indian companies due to the Corona crisis. Industrial and Commercial Bank of China and China Investment Corporation are trying to find good investment opportunities in India. Chinese banks have about $600-650 million to invest in such companies.  ICBC had set aside $200 million for investing in the growing micro, small and medium enterprises in India. China has been buying shares in small Indian enterprises.

India received Rs 14.846 crore worth FDI from China between April 2000 and December 2019.

Securities and Exchange Board of India (SEBI) was also monitoring transactions by China, when share prices of companies have dropped due to the coronavirus pandemic.

Indian Response

Alarmed by the Chinese actions, the Indian government has now revised India’s Foreign Direct Investment (FDI) policy. Investments from China will now need a prior clearance from the government. The policy will apply to all countries that share border with India such as China.

Press Note 3

On 17th April, Department for Promotion of Industry and Internal Trade issued Press Note 3 (2020 series) titled ‘Review of Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic’.

According to the Note, Para 3.1.1(a), “…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.”

Effectively this means that Chinese companies will need approval from Indian government before making investments in India. In the time of this crisis, this will prevent China from buying Indian assets and companies at lower than fair evaluations.

World Opinion

Like India, other countries such as Australia and Germany have made similar moves. Globally, transactions by Chinese companies and agencies and institutions have come under the radar especially because the shares are being purchased at reduced valuations. US and Japan have already placed restrictions on Chinese companies buying assets.

Benefits to India

According to ASSOCHAM Secretary General Mr. Deepak Sood, the policy revision is justified and should prevent those seeking to takeover Indian companies under financial stress. He said that market capitalization of many companies has declined by 50-60 per cent, which does not reflect their true valuation. Such companies can be easy targets for opportunist takeover.

The policy will send a signal to Indian companies that the government will safeguard their interests in difficult times. This is also a message to China that India will not give up control of its domestic companies to China through opportunistic tactics.

Meanwhile, China protested these changes in FDI policy saying they violate World Trade Organization (WTO) principles of non-discrimination and are against free and fair trade. China can take actions against Indian companies in retaliation of the move. However, given the current economic environment this is a welcome move by the Indian government, and has been praised by the opposition parties as well.

Sources:

  1. https://dipp.gov.in/sites/default/files/pn3_2020.pdf
  2. https://www.indiatoday.in/business/story/alarmed-by-chinese-bank-raising-stake-in-hdfc-centre-revises-fdi-policy-1668407-2020-04-18
  3. https://www.theweek.in/news/biz-tech/2020/04/18/hdfc-stake-impact-centre-tweaks-fdi-norms-with-an-eye-on-china.html