Worried over China buying equity in Indian companies, Govt tightens FDI norms

Within days of the People’s Bank of China raising its stake in Housing Development Finance Corporation (HDFC), the government has revised its foreign direct investment (FDI) policy to bar any “opportunistic” takeover or acquisition in domestic companies by its neighboring countries in the wake of the spread of Covid-19. Until now, restrictions related to FDI were applicable only for Pakistan and Bangladesh.

“A non-resident entity can invest in India, subject to the FDI policy except in those sectors/activities which are prohibited. 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,” a press note by the Department for Promotion of Industry and Internal Trade (DPIIT) said.

While India shares its borders with countries including Bangladesh, Bhutan, Myanmar, Nepal, Pakistan, and Sri Lanka, the revised norms will affect China the most.

While until now a foreign investor could invest in India, subject to sectoral FDI norms, those from Bangladesh and Pakistan were allowed to invest only in select sectors and that too after government approvals.

In India, FDI is either allowed through the automatic route, where companies do not require any government approval, or through the government route, for which companies have to seek government nod.

Reports have suggested that several China-backed funds including Industrial and Commercial Bank of China (ICBC) and China Investment Corporation (CIC) are aggressively looking for investment opportunities in Indian companies in various sectors as their valuations have taken a hit due to the spread of the deadly coronavirus.

While Chinese investors have been looking for investment opportunities in Indian firms even before the outbreak of the coronavirus, analysts said that at this juncture many Indian companies will be in a vulnerable situation with very low valuations.

Many Indian startups including Paytm, Zomato, Ola, and Byju’s already have financial backing from Chinese companies.

Several other countries including Germany and Australia too have tightened their overall investment norms to bar foreign companies from hostile takeovers..