India Stops Chinese FDI To Protect Indian Firms; Chinese Govt Issues Stinging Response

India Stops Chinese FDI To Protect Indian Firms; Chinese Govt Issues Stinging Response
India Stops Chinese FDI To Protect Indian Firms; Chinese Govt Issues Stinging Response

The COVID-19 pandemic originated in China, late in 2019. As the cases decline in the country now, it is restoring its economy. However, other countries are coping with the pandemic and their economies are on their knees. 

This seems like a good opportunity for China to invest in or take over the companies in other countries!

Recently, People’s Bank of China upped its stake in the HDFC bank from 0.8% to 1.01%!

Following this, the Indian Government amended its Foreign Direct Investment (FDI) policy to prevent the hostile takeover of distressed firms. 

FDI Policy Tweaked!

Until now, a non-resident entity or a foreign investor could invest in India, except in sectors/activities which are prohibited in accordance with FDI policy. However, countries such as Bangladesh and Pakistan could invest only after government approvals and only in select sectors.

A release by the Department of Promotion of Industry and Internal Trade (DPIIT) on April 18, notified changes in its FDI policy by mandating government clearance for all FDI inflows from countries with whom it shares land borders.

The move may impact investments from countries such as Nepal, Bangladesh, Pakistan, Sri Lanka, Myanmar, and Bhutan but most importantly China. The Centre has banned Pakistan from investing in Indian sectors of defence, space, atomic energy and also sectors/activities related to FDI. 

DPIIT said, “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.”

Apart from India, Australia, the United States of America and the European Union have also taken measures to counter the Chinese move amid the COVID-19 crisis! 

Meanwhile, many companies like Apple and other South Korean firms are thinking about moving their manufacturing plants from China!

Why did the Centre Take this Move?

After tweaking the rules governing the FDI in Indian companies said this was being done to prevent hostile takeovers of Indian companies whose market values have taken a severe hit due to COVID-19 related uncertainties. Now, such investments will now need prior government approval.

This move by the government comes after reports of China trying to acquire stressed assets in strategic sectors globally as many companies are experiencing a substantial fall in their valuations due to lockdown to curb the spread of the COVID-19 virus. 

Last week, after China’s Central Bank raised its stake in HDFC bank, many people voiced their concerns regarding takeover of  India’s systemically-important companies by foreign investors as their valuations have been hit given the correction in equity markets because of the pandemic and the consequent lockdown.

Girish Vanvari, founder, Transaction Square, a tax and regulatory consultancy firm said, “FDI restrictions from countries having a border with India was much anticipated. This is to prohibit particularly Chinese companies from directly or indirectly acquiring Indian companies, many of which have lost significant value due to the COVID-19 crisis. This is line with what other countries like Australia have done.”

What Will be the Process for FPIs Now?

Foreign investments into India come via FDI and the foreign portfolio investment (FPI) route. While FDI is regulated by the DPIIT under the ministry of finance whereas FPI comes through the stock market and is regulated by Securities and Exchange Board of India (Sebi).

There are a total of 16 Chinese FPIs registered in India with $1.1 billion invested in top-tier stocks. The exact level of China’s investment through direct and indirect (beneficial ownership) routes is not in public domain. As for fund structures situated elsewhere in the world, Chinese investors could be beneficial owners.

While DPIIT issued a release tweaking the FDI policy, the Sebi has increased its investigations of FPIs coming from China, Hong Kong and 11 other Asian countries.

A person familiar with the matter said, “Sebi will also revive its first communication that investments coming from India’s neighbours would require separate regulatory approval.”

Currently Sebi adopts a hands-off approach in granting new FPI licences. If a fund is eligible under the rules then Sebi and the custodian grant approval. 

Sebi had first issued this communication on Monday but by late evening had placed it in suspension state awaiting clarity from the government.

Chinese Ambassador to India’s Response on the Matter!

After India tweaked its FDI policy, China claimed that it had done nothing but act as a ‘responsible country’ and had proven its international co-operation. Sun Weidong, the Chinese Ambassador to India quoting State Councilor and China’s Finance Minister Wang Yi tweeted, “As the first country to alert the world about the virus & to grapple with a serious outbreak, China served as a crucial line of defence for the world. Fighting off the virus with strength, ingenuity & sacrifice, China boosted global confidence in an ultimate victory.” 

Chinese Ambassador to India Sun Weidong took to Twitter to address the fact that it was China that had first alerted the world regarding the pandemic.

The ambassador added, “China has managed to restore its economy and society step by step to normal. The early economic reopening of ‘the world’s factory’, has significantly eased the strained global medical supplies. It will also help bring the world economy back to normal at an early date.”  He highlighted that China had sent teams of experts to frontline countries and also reduced the strain on global medical supplies.

He also stated that in these times of crisis instead of ‘scapegoating’, ‘cooperation’ is needed.

The Centre’s move is appreciated as it ensures keeping the Indian businesses and startups secure in this pandemic crisis!

Here is the thread of tweets by Chinese Ambassador to India Sun Weidong

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