The Indian government has changed FDI norms to indirectly create a firewall against hostile takeover of Indian companies by Chinese firms. Coronavirus has resulted in reduced valuation of many firms, making them vulnerable of acquisitions by the dragon. Complete Coverage: Coronavirus
Crux of the Matter
Great Wall of FDI The government of India tweaked Foreign Direct Investment (FDI) norms. It seems that it is primarily aimed to prevent a hostile takeover of Indian firms by Chinese companies. As per the new norm, a non-resident person or entity that resides in the nations that border India can only invest in Indian firms after government approval. If a Chinese company has invested in an overseas firm, which in turn invests in an Indian firm (such a Chinese firm would be categorized as Beneficial Owner), then also the new FDI norm would be applicable. Concerns for India began to rise when China’s central bank, People’s Bank of China bought 1% stake in Indian’s leading private sector lender HDFC. It also must be noted that this FDI norm was in place for investors from Pakistan and Bangladesh. Many also say that India’s strategy for ringfencing investments from the dragon are being mulled over from mid-2019
Supporting Measures Indian government has also asked the Securities and Exchange Board of India (SEBI) to provide details on investments by nations in the Foreign Portfolio Investments (FPI). SEBI will specifically look for ‘Beneficial Owners’ from Pakistan, Myanmar, Iran, Taiwan, and North Korea based on the government directive. This move seems to be aimed at figuring out management or ownership by Chinese firms in domestic companies. On a different note, the government has indirectly put a cap on FPI investments as well. Any FPI investment above 9.9% in a firm is directly considered FDI. And now FDI required government sanctions, therefore, FPI investors cannot invest beyond 9.9% in an Indian companies without government permission.
We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair, and equitable, business environment. Additional barriers set by India 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. Ji Rong, Spokesperson, Chinese Embassy
India’s Worries India’s startup ecosystem may take a hit as many of them receive funds from China. 19 out of 30 unicorns of India are funded by China. It has also invested nearly $4 billion as greenfield investments in Indian startups. The spending capacity of Chinese firms comes from the prevailing low-interest rates for business in the economy and the recently announced aid in the stimulus package. Apart from that China can support the acquisition of foreign firms with its $3.107 trillion forex reserve. To save domestic firms from takeover by the dragon, many countries in the European Union like Germany, Spain, and Italy have also implemented stricter FDI guidelines and many other nations are mulling over it. These companies are vulnerable because they are not able to pay their debts and are willing to sell the stake to any potential buyer.
Curiopedia
Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. FDIs are distinguished from portfolio investments (FPIs) in which an investor merely purchases equities of foreign-based companies.
A green-field investment is a type of foreign direct investment (FDI) in which a parent company creates a subsidiary in a different country, building its operations from the ground up. The term “greenfield investment” gets its name from the fact that the company—usually a multinational corporation (MNC)—is launching a venture from the ground up—plowing and prepping a green field.
China’s central bank, People’s Bank of China invested a little over 1% in HDFC. As per the shareholding disclosures for the March quarter, the People’s Bank of China held 1.75 crore shares of HDFC. The particular time and date of investment are not known though. These investments could have been done on any day in the first 3 months of 2020.
Curated Coverage
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