China seeks FDI policy revision aimed at shielding Indian firms’ takeover

The Indian government brought China under the ambit of regulations preventing such takeovers and acquisitions on Friday, with authorities saying any Chinese investments would now require the government’s approval.

China on Monday asked India to revise what it described as a “discriminatory” change in foreign direct investment (FDI) regulations aimed at preventing opportunistic takeovers of Indian firms amid the Covid-19 crisis.

The revision of the FDI policy came close on the heels of China’s central bank buying a 1.01% stake in HDFC in the first quarter of 2020. (Bloomberg file photo)

The Indian government brought China under the ambit of regulations preventing such takeovers and acquisitions on Friday, with authorities saying any Chinese investments would now require the government’s approval. The revision of the FDI policy came close on the heels of China’s central bank buying a 1.01% stake in HDFC in the first quarter of 2020.

“We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment,” Chinese embassy spokesperson Ji Rong said in a statement that was Beijing’s first formal response to the tweak in India’s FDI regulations.

Ji said the “additional barriers” set by India for “investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment”.

The Chinese side also contended the changes in India’s FDI rules “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”.

There was no immediate response to Ji’s remarks from Indian officials though people familiar with developments said the Indian government couldn’t allow vulnerabilities created by the Covid-19 pandemic to be exploited by any country, including China.

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One of the people cited above, on condition of anonymity, said: “A pre-emptive action was needed to protect Indian assets from hostile acquisitions and takeovers, particularly start-ups that have little money power. The necessity is not just felt by India, but many other countries, including powerful G20 nations, which have expressed serious concerns about Chinese designs.”

The person added: “The actions of Chinese investors, with tacit backup from their government, are not fair business as usual. Hence there is a need to protect our domestic interests.”

The people said there was no bar on the entry of Chinese firms into India or investments by them, but all proposals will have to go through the government.

“This is not just targeted at China but all countries that share borders with India. It is surprising why China is so perturbed, if it believes in ethical business,” the person cited above said.

Earlier, only investments from Pakistan and Bangladesh required the Indian government’s approval for security reasons. Without naming China, an order issued by the department for promotion of industry and internal trade (DPIIT) on April 17 said the scope of the policy had been widened to cover all neighbouring countries that share a border with India.

Ji noted that China’s cumulative investment in India exceeded $8 billion as of December 2019, “far more than the total investments of India’s other border-sharing countries”. She added, “The impact of the policy on Chinese investors is clear.”

The revision of the foreign investment policy by the DPIIT will make it “much difficult for companies from countries sharing land border with India, including China, to invest in the country”, Ji said.

Ji contended Chinese investments have “driven the development of India’s industries, such as mobile phone, household electrical appliances, infrastructure and automobile, creating a large number of jobs in India, and promoting [mutually] beneficial and win-win cooperation”.

She also noted that Chinese enterprises were actively making donations to help India fight Covid-19 and sought to urge India to create a “favourable investment environment” that would help drive recovery after the pandemic.

“Where companies choose to invest and operate depends on the country’s economic fundamentals and business environment. Facing the economic downturn caused by Covid-19, countries should work together to create a favourable investment environment to speed up the resumption of companies’ production and operation,” Ji said.

The Indian government’s tweak in FDI rules followed concerns that Chinese firms, including its mammoth state-run companies, could take over Indian companies at a time when their valuation has taken a massive hit because of the economic crisis triggered by the Covid-19 pandemic that originated in Wuhan nearly four months ago.

According to the DPIIT’s order, “an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route”.

The order also requires the government’s approval for transferring ownership of an Indian company to any “existing or future” foreign investor belonging to the countries that share a border with India.

Bangladesh, China, Pakistan, Bhutan, Nepal and Myanmar share borders with India, but there are some exemptions for Nepal and Bhutan-based entities.

Congress leader Rahul Gandhi had on April 12 cautioned the government against takeover threats. “The massive economic slowdown has weakened many Indian corporates making them attractive targets for takeovers. The government must not allow foreign interests to take control of any Indian corporate at this time of national crisis,” he had said.