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Wednesday, April 14, 2021

Will India’s amended FDI rules amid the COVID-19 pandemic completely restrict Chinese investments?

India became one among numerous countries to restrict Chinese investment and amend their FDI rules, acting out on fears that China and Chinese entities might swoop in to buy Indian companies after the COVID-19 pandemic that have already weakened due to the crisis. This will impact how India deals with FDI in general and not just China. Here’s why we think India made this critical move.

China buys HDFC shares
A closeup of the trademark brand logo of HDFC Bank hanging outside their office building (Photo: shutterstock.com/Rahul Ramachandram)

The big buy

It all started when China’s People’s Bank of China (PBoC) bought shares amounting to 0.2 per cent stake in HDFC Ltd. This made them the owner of 1.01 per cent stakes of India’s largest housing finance company and it had the Indian government alarmed. The transaction was perfectly legal and amid a global market crash, buying stocks of a company that had recently seen a 32 per cent drop in market cap was even a smart move but this came at a time when the entire world is alleging Chinese firms of exploiting the market crash to takeover firms in vulnerable economies. The Securities and Exchange Board of India (Sebi), alarmed by the move, informed the finance ministry.

On April 17, the commerce ministry’s Department for Promotion of Industry and Internal Trade (DPIIT) amended the guidelines of Foreign Direct Investment (FDI) coming into the country from its neighbouring states. The new regulations state that any investment from countries that India shares a border with will be scrutinised by the government. Even though this did not name China particularly, it was definitely aimed towards them. obviously, China did not take this well.

What about Chinese investment?

“The impact of the policy on Chinese investors is clear. The additional barriers set by the Indian side for investors from specific countries violate the WTO’s principle of non-discrimination and goes against the general trend of liberalisation and facilitation of trade and investment. More importantly, they do not conform to the consensus of G20 leaders and trade ministers to realise a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open,” Chinese embassy spokesperson counsellor Ji Rong told the media. “Companies make choices based on market principles. We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment.”

But India dismissed any such claims and said that this was well within their rights to amend the regulations even amid the COVID-19 pandemic. “It does not violate any WTO guideline in any way. We are well within our rights to formulate or tweak any policy. Just to be clear, we are not blocking any investment, only making sure that the intent behind it is positive. What is wrong with that?” said a senior commerce ministry official, reported Bussiness Today.

Will India's FDI rules amid COVID-19 restrict Chinese investments?
Representational Image. Photo: Shutterstock.com/Imagine Photographer

How will the amended FDI rules affect?

But this move will not just affect Chinese investment but also put foreign firms which have investment from Chinese companies under government scrutiny when they intend to invest in India.

This too has a rationale. Even though China ranks only 18th when it comes to FDI in India, a lion’s share of investments from other countries like Hong Kong and Singapore originates in China. Singapore has invested a total of $94.6 billion in India over the last two decades. This accounts for 20 per cent of all FDI that has come into India making Singapore the second-largest FDI contributor in the Indian economy. Current data also suggests that Hong Kong had invested $4.2 billion in total during the same period. Over the past 20 years, Chinese FDI into India hardly added up to $2.3 billion, said Commerce Minister Piyush Goyal last December. This is just 0.5 per cent of the entire FDI in India. Even though China claims that the actual investment is $8 billion, there has been no confirmation about that yet. If we were to consider that it was true, that only makes their investment 2 per cent of the total FDI in India.

The threat of hostile takeovers, some say, is imminent. “The worst of the pandemic is over for China, and valuations of some Indian companies, both listed and unlisted, look attractive. There is interest from Chinese investors in sectors such as mobility, renewables, pharmaceuticals, manufacturing, infrastructure and construction,” MD of Centrum Infrastructure Sandeep Upadhayay told Economic Times recently. “Hostile takeovers are not a country-specific risk and can happen from anywhere in this time of crisis when valuations of companies are down. We need to take precautions from everywhere. China carries a higher risk because of its political setup which is considered to be non-transparent,” Bhartiya Janta Party’s National Spokesperson (Economic Affairs), Gopal Krishna Agarwal told BT.

India is not alone

Even though it is majorly aimed at preventing opportunistic takeovers the changes in the regulations that India has recently made would have an impact on the Chinese firms that have already invested and been thinking of investing more capital here. India is not alone in its attempt to safeguard its firms though. European countries, including Spain, Italy, France and Germany along with Australia, have, over the past couple of months put similar restrictions on “opportunistic investments” from China. But India is definitely the biggest economy, in terms of sheers size, of them all. Another aspect that sets India apart is that India is a developing economy that needs the stimulus to break out of the financial rut it is in. According to reports from the International Monetary Fund (IMF), India’s GDP will fall down to 1.9 per cent this year and a revival to even where it was before the lockdown and the pandemic will need a growth rate of more than 7 per cent.

But is India worried for no reason?

Chinese investments, experts said, often follow a pattern. At the peak of the debt crisis, there was a massive inflow of Chinese direct investment into the European Union, reported The Week. A Financial Times report noted that, in 2010, the total stock of Chinese direct investment in the EU was just over €6.1bn, less than what was held by India, Iceland or Nigeria.”By the end of 2012, Chinese investment stock had quadrupled, to nearly €27bn, according to figures compiled by Deutsche Bank.” Thilo Hanemann, an expert in Chinese outbound investment, told The Week that “this was partly opportunistic buying because assets were cheap and partly it was a structural secular shift in Chinese outbound investment, from securing natural resources in developing countries to acquiring brands and technology in developed countries.”

Recently, news reports said that Chinese firms were ready for a host of great discounted deals in Europe, where domestic companies are struggling under a crisis spurred on by the coronavirus pandemic. The publication reported, quoting sources, “Bankers have recently seen a spike in requests from Chinese firms and funds for proposals on targets in Europe. Many of the potential acquirers are state-owned enterprises.”

Either way, whether we put pressure on China or allow free FDI flows, as the BJP spokesperson said, “We need not get entangled in any global warfare and we just need to protect our domestic interests. Others should not use our shoulders to fire in China.” He further added, “We should also be a bit cautious when dealing with FDI because while we have an abundance of labour and raw materials, we are short of capital. So, we also need investments. China is the world’s second-largest economy and has the capital. So, it would not be prudent to restrict investments entirely. We need a balance.”

 

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