Government Has Brought In New FDI Rules

In News

The Government of India revised its FDI policy to curb the opportunistic takeovers of the firms due to the impact of COVID-19.

In Detail

• On April 17, the Department for Promotion of Industry and Internal Trade (DPIIT) revised the FDI policy to curb the opportunistic takeovers and acquisitions of Indian firms.
• The new FDI revised policy states that “A non-residential entity or a citizen, which shares land borders with India can invest only with prior permission from government”.
• The revision is to have a control on FDI from a non-residential entity or a citizen of a country which shares land borders with India and mainly restricting Chinese firms from acquiring a stake in Indian companies.
• Before the policy revision, countries like Pakistan, Bangladesh has to undergo government scrutiny. While countries like Sri Lanka, Myanmar, Bhutan and Nepal are not major investors.
• India has opened most of the sectors of the economy for FDI investmentsvia the automatic route. But sectors like defence, space and atomic energy are prohibited.
• The revised policy also mentions that government permission is mandatory for any type of FDI investments i.e., Greenfield or brownfield.
• Greenfield investments are investing in new plants or investing in new production capacity. Brownfield investments are investing in existing plants.
• This policy change is a reference to the possibility of Chinese investors purchasing under-valued shares of Indian companies.

Unintended Problems

• The policy does not distinguish between different investments such as industry players, financial institutions and venture capital funds. So, such an application may lead to unintended problems.
• Making government approval necessary for acquisitions in private companies by Chinese investors will reduce potential investors and valuation.
• It will also be extremely difficult to mark the nationality of venture capital funds or fix the beneficial ownership to the founders of a certain nationality.
• In India, companies such as Zomato, Swiggy, Makemytrip, Bigbasket, Oyo, Ola and Snap deal are either venture capital funds registered in off-shore or listed in stock exchanges in the US or Hong Kong.

Opposing China’s Investment in India

• For Chinese investors, India has been an attractive destination with a lot of investments in sectors like mobile technologies and products, automobiles, financial technologies and startups.
• Indian MSMEs in the engineering sector has also been an attractive target for Chinese firms. But, associations of MSMEs are pleading the government to stop investment into domestic firms.
• Chinese investment in India was opposed by many Indian companies and groups like Swadeshi Jagaran Manch (SJM).
• On April 12, the People’s Bank of China invested in HDFC and raised its stake to one percent. This resulted in a lot of concerns from various sectors and countries.
• As is seen the world over, the stock market slump brought upon by the COVID-19 pandemic has lowered the stock prices of major companies, among them are many strategic companies. Chinese state and private investors, sensing an opportunity are buying stocks in such companies and strengthening control in these companies.

FDI in India

• FDI India acts as an agent that connects foreign direct investment opportunities to foreign investors.
• It acts as a reference platform that matches investors with investment and provides easy connectivity with investors.
• The FDI in India can be accessed through two routes-Automatic Route and Government Route.
• Automatic Route-Under this route, foreign direct investment is allowed without any government approval.
• Government Route-Under this route, before making an investment government approval is a must. The proposals for investments are considered by the administrative ministry department.

Conclusion

In the time of the COVID-19 pandemic, Chinese investments are seen as an attempt to take over national assets. With the new FDI policy, India can monitor Chinese investments and acquisitions.But, it has the potential to disturb bilateral relations with China.