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Amendment of the FDI policy: veiling from the Chinese

Author: Pranab Sen

During this time of global pandemic, where the earth is healing in its natural state, some of the companies in developed countries are jeopardized at the hands of opportunist takeovers taking advantage of their weak finances during the pandemic. Countries like India, Australia and some of Europe are taking stringent measures to protect their economy and initiating protectionist policies to safeguard their companies from hostile takeovers and major changes in the investment portfolios.

In this connection, the Indian Government has tightened its Foreign Direct Investment (FDI) policy by re-reviewing the current clauses by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry. In a phase fraught with geopolitical and economic ramifications, an amendment has been implemented in order to blanket or ban on investments through the direct route by entities which share national borders with India. The primary objective of introducing the new FDI policy is mainly to restrict any kind of opportunistic takeovers of Indian companies whose valuation has been badly hit due to corona outbreak. In accordance to the new policy, countries like Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, China and Afghanistan which shares land borders with the Indian territory cannot directly invest through the automatic route into the sectors without the approval from the Government of India.

Since many years, in India, FDI is allowed primarily under two routes: Automatic Route and Government Route. 100% FDI was permitted under the automatic route in manufacturing, oil and gas, Greenfield airports, construction, railway infrastructure etc. and sectors like defense, broadcast and print media, aviation, lottery etc. are still under the prohibited list of foreign investment. Moreover, at present, India is not expecting or concerned with future possibility of takeovers or acquisitions from European or US- based companies rather its attention is focused on vital forces or entities backed the Chinese government. Therefore, of all these countries, only one nation which has the financial capability to indulge in takeovers or exploit the financial vulnerability of the Indian companies whose valuations has been badly hit by the novel Coronavirus pandemic is probably, China. In India, the FDI policy earlier was only restricted to only Bangladesh and Pakistan allowing them to invest via the government route in all sectors. The revised policy has now brought Chinese companies under the government route filter leading to direct scrutiny or assessment by the Indian government for any further FDI in the country across sectors.

The introduction of new FDI policy mainly triggered after the People’s Bank of China (PBOC) – the Chinese central bank, raised its’ stake in a major Indian lender (HDFC) from 0.8% previously to 1.01% in the mid April 2020, paving its way to the Indian banking sector. This mainly acted as a stimulus for the Indian policy makers to bring new anti-takeover measures for protecting Indian companies from getting acquired.

China has always been one of the largest trading partners for India and one of the largest project contracting markets for China in the Asia-Pacific region. Let us have a look on some of the present and historical facts that endorses India’s fear of losing national assets towards Chinese investors at a time when the global market is turning vulnerable and China is strategically acquiring companies in the dwindling economies.

 

Chinese multinational conglomerate, Alibaba and Tencent has been aggressively increasing its stake in Indian Start-ups in the last six years, the majority of which has successfully achieved unicorn status. To be more specific, more than 50% of Indian Unicorns have been heavily funded by the above two Chinese multinational giants. Moreover, almost 55% of total investment of $14.5 Billion in 2019 in Indian start-ups is captured by Chinese investors. Below mentioned are the Indian Unicorns which have some investment component backed by the Chinese investors – Alibaba & Tencent.

  • Investment by Alibaba Group: BigBasket, Daily Hunt, Healofy, Paytm Mall, Paytm, TicketNew, Vidooly, Xpressbees, Rapido, Snapdeal and Zomato.
  • Investment by Tencent Group: Byju’s, Ola, Doubtnut, Dream11, Flipkart, Niyo, Gaana, Hike, Khatabook, MXPlayer, Mygate, Pine labs, Pocket FM, Practo, Swiggy and Udaan

Listed below are few statistics related to some major Chinese Investment and trade set-ups in India:

  • Xiaomi invested $504 million in early 2019 for funding its plan of opening 5000 retail stores in India.
  • Chinese mobile phone companies put together generated more than $7.2 billion revenue in 2018.
  • Recently, Chinese companies also entered into the highway construction and railway sector as well.
  • SAIC Motor Corporation, a Chinese auto manufacturer has made an investment of around $288 million as a part of their expansion plan of an older General Motors plant in Gujarat.
  • Fosun Pharma, a Chinese drug giant acquired 74% stake in India’s Gland Pharma.
  • Few Chinese banks are also extending debt to large-cap Indian companies, one such example is the Industrial and Commercial Bank of China (ICBC), which recently beefed up its team in Mumbai.

Additionally, there are hundreds of small and big Indian companies who are directly or indirectly funded by Chinese multinational giants. Also, China has been one of the top FDI sources globally with Asian countries capturing 74% of total FDI inflows from China. Considering all the above factors, it has become quite evident that the FDI policy comes on the heels of the Government of India to clarify which requires the Securities and Exchange Board of India to scrutinize any planned investments in the Indian Stock markets from China via Hong Kong, Singapore and some other countries.

According to some Government sources the move was already in the pipeline for a while but the outbreak of Covid – 19 has speed up the process. This move coincides with similar barriers fabricated by countries like Germany, Italy, Spain and Australia to obstruct acquisitive capital from China. Also, China, with all its economic corridors has been paving its roadmap to the Indian sub-continent as well as proving its supremacy to the other developed nations. Notably, while all the manufacturing and production units across the world are in halt, owing to the pandemic created by Covid-19, the Chinese have reignited its manufacturing capabilities indicating its’ intention to accelerate its economic pace and take advantage of the global recessionary situation.

#FDI #ChinaInvestment #startupinvestment #covid-19 #startupcrisis #ResearchFox

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