FPIs from China, Hong Kong to come under close scrutiny

Prashasti Awasthi Mumbai | Updated on May 22, 2020

India has formulated rules to bring tighter scrutiny of new Foreign Portfolio Investors (FPIs) from China and Hong Kong in order to barrage foreign inflows during the coronavirus pandemic, Reuters reported.

The news came after India maintained that it will monitor all foreign direct investment (FDI) from countries with which it shares the geographical border. The move has been considered to stave off takeover when asset prices fell during the coronavirus pandemic. The Chinese government described the policy as discriminatory.

FDIs are longer-term direct investments that typically provide control over a firm's management. The Centre was concerned that the policy change could prompt Chinese investors to ramp up their investment in India as portfolio investors, purchasing company securities such as equities to gain control, officials in New Delhi said to Reuters.

Two senior government sources said India could set up a body to scrutinize new FPI registrants from countries such as China, and the rules will also apply to Hong Kong, a special administrative region from where substantial Chinese investments are routed.

The officials said that the trade ministry in consultation with the capital market regulator, the Securities and Exchange Board of India (SEBI), have drafted a rough proposal, which is currently being reviewed by the finance ministry.

The two sources added Centre is also mulling on necessitating a so-called "security clearance" from India's home (interior) ministry for new FPI registrants from these nations.

"We are not saying that any investment would be stopped, we just want to add a layer of vetting to protect the value of our companies," said one official to Reuters who has direct knowledge of the discussions.

A third government source of Reuters said that India was apprehensive of Chinese-state run companies buying stocks of Indian companies. The source added the FPI rules were likely to be similar to the recently announced FDI policy which didn't name China but applies to countries with which India shares a land border.

However, the sources noted that it is not clear whether the proposal would be extended to other countries as well. There are currently 111 registered FPIs from Hong Kong and 16 from China.

These concerns surfaced after shareholding disclosures by Indian lender HDFC in April showed China's central bank’s significant increase in shares of the company.

Meanwhile, many Chinese investors are awaiting clarity in the plan of action as the news of the policy change has already dismayed many of them, Reuters reported.

Published on May 22, 2020

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