After the coronavirus pandemic sent stocks tumbling and raised fears of “opportunistic takeovers” by Chinese companies, New Delhi entertained key revisions in its foreign direct investment rules for neighbouring countries. A notification circulated by the trade ministry last month stated that “the Government of India has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.”
Though it didn’t specifically mention Beijing, senior government officials confirmed that the new screening order would be “interpreted in a broad manner” to both mainland China and Hong Kong.
The new rules target fire sales of corporate assets during the pandemic and require all foreign investments from neighbouring countries to seek prior government approval. This effectively blocks the option of redirecting investments via “automatic routes.”
Similarly, government approval would be needed for a change in ownership of any Indian company that has on-going foreign investment at play. Above all, the policy is set to ramp up scrutiny of greenfield investments – a multibillion-dollar market sector driven by heavy Chinese funding.
Note that a larger narrative on “opportunistic takeovers” is already afloat in the European Union and the United States. It alleges that China’s acquisition proposals are a hostile attempt to target cash-strapped businesses hit by the pandemic.
India chose to align with such sentiments in early April when local reports emerged that the Industrial and Commercial Bank of China (ICBC) and China Investment Corporation (CIC) were on the lookout for “good investment opportunities” in the country’s lucrative financial services sector. New Delhi billed those fears as concrete when the People’s Bank of China increased its shareholding in India’s largest nonbanking mortgage provider Housing Development Finance Corporation from 0.8 to one per cent. This development was met with particular scepticism in New Delhi, which decided to issue its expansive new FDI rule shortly thereafter.
More significantly, a part of India’s emerging thought-process was this: in the absence of such a confrontational policy, it may struggle to demonstrate any degree of control over well-timed Chinese investments.
However, several constraints hinder India’s prospects of exercising such control. First, Beijing’s total planned and current investments exceed $26 billion in India; the last thing New Delhi needs is to risk this promise with a diplomatic rift. There is also research to suggest that the growth of these investments depends upon India’s consistent engagement with the Chinese private sector – an emerging segment of Beijing’s foreign policy apparatus that deals with major trade and investment decisions. In light of Delhi’s revised FDI rules, doubling down on Chinese trade inflows does little to further these engagements.
Second, Beijing has responded to India’s policy change by calling it “discriminatory”, alleging that the rules were in violation of WTO’s “free and fair” trade principles. Part of this criticism stems from the understanding that Chinese investments have driven the development of India’s industries. There is a wide body of evidence to establish this as a fact.
Chinese companies enjoy a two-thirds share in India’s billion-dollar startup industry and serve as the chief financiers of some of India’s most powerful ventures to date
From Hong Kong alone, Chinese investments into India over the past two decades have increased by almost two-fold, totalling $4.2 billion last year. Export volume to India stood at $15,456.1 million by the end of March – a 60 per cent increase since February, despite a COVID-19 pandemic gaining force. Chinese companies enjoy a two-thirds share in India’s billion-dollar startup industry and serve as the chief financiers of some of India’s most powerful ventures to date. Acquisitions in domestic companies, and a uniformed presence in strategic sectors such as telecommunication and finance, have collectively afforded Beijing its enduring stake in the Indian market.
Therefore, targeting these very acquisitions will adversely affect investor confidence on both sides of the border. Moreover, India will accomplish only one objective: put its interests on the line.
In a sign of mounting domestic pressure, New Delhi is now prepared to introduce a fast-track mechanism for Chinese investments, which would approve proposals in a “non-sensitive” market sector within weeks. The prospective mechanism would consider multi-factor approval criteria, including the value of the stake being bought and the sector it identifies with.
The ultimate goal of this fast-track option is to protect Indian firms that are financially stressed, and remain closely aligned with India’s more “sensitive” or strategically viable market sectors. What this mechanism fails to consider is an alternate scenario: China may discover that the protection of lucrative firms is an attempt to sell off less viable entities at throwaway prices to Beijing.
Therefore, without including any of these distinctions into its revised FDI order, India may end up frustrating Chinese investments at a cost it just cannot afford: risking its economic stability.
The writer is a research analyst at the Islamabad Policy Research Institute, and an author