Responding to the concerns that Chinese entities could mount takeovers of Indian companies during the Covid-triggered market rout, the Centre has taken a somewhat hasty decision to regulate Foreign Direct Investment (FDI) from neighbouring countries, read Chinese entities. Through a Press Note on Friday, it has specified that all inbound FDI, even into non-strategic sectors would henceforth be subject to Central approvals for entities from countries that share land borders with India. This move, while welcomed by one section of India Inc, opens up a Pandora’s Box for Indian businesses who are in dire need of capital, because the note makes no distinctions between existing and new investments, treats greenfield and brownfield investments alike and sweeps beneficial ownership criteria into its purview which could lead to re-opening of past deals. Given that the note does not offer any rationale for differential treatment of FDI from select origins, China has lost no time in terming it as ‘discriminatory’ and violative of WTO rules.
Covid-19: Govt steps in to curb opportunistic takeovers of Indian companiesAfter SEBI move to review Chinese FPI investments, Government tweaks FDI policy to prevent hostile takeovers of Indian companies in current times.
While there is some merit in worries about hostile entities gaining a back-door entry into sectors with strategic or national security implications at a vulnerable time like this, the latest policy tweak is a blunt instrument to deal with this challenge. For one, India’s start-up ecosystem, which offers one of the few bright spots in the economy, is heavily dependent on Chinese risk capital, with 18 of India’s 30 tech unicorns said to feature China-linked investments. Abruptly choking off this capital can have adverse implications for both economic activity and job creation. Two, while the Indian government may be giving in to second thoughts on Chinese investments, there’s no going back on the Indian consumers’ voracious appetite for Chinese brands in the fast-growing mobile phone, consumer appliance and electronics markets. In these sectors, allowing Chinese FDI that facilitates some local value-addition appears to be vastly preferable to allowing a flood of finished goods imports that worsen the trade balance. Three, it is not even clear if added scrutiny can really help Indian regulators curb opportunistic investments, given that a large proportion of FDI flowing into India anyway tends to be routed through multi-layered structures housed in low-tax jurisdictions such as Singapore, Hong Kong and Mauritius. Past attempts to dig into beneficial interests behind these flows have proved fruitless, with policymakers having to back-track at the first sign of push-back from foreign investors.
Going forward, as India tries to limp back to normalcy after the Covid crisis, it is quite evident that it will have to rely heavily on FDI flows to re-fire its investment engine, particularly with its remittances economy under siege, domestic corporates debilitated by the lockdown and portfolio investors in flight mode. Looking into the colour of FDI money at such times will be a luxury India can ill-afford. If the Centre is indeed worried about compromises to strategic interests from FDI, this would be better addressed by revisiting sector-wise FDI regulations, rather than try and distinguish between flows by origin.