India toughens rules on investments from neighbours, seen aimed at China
Covid-19: The move follows concerns that China could take over Indian companies at a time when their valuation has taken a massive hit because of the economic crisis triggered by the pandemic that originated in Wuhan nearly four months ago.
The Indian government has brought China under the ambit of regulations that would prevent takeovers and acquisitions of Indian firms amid the Covid-19 pandemic, and an official said on Saturday any Chinese investments will now require the government’s approval.
The move follows concerns that China could take over Indian companies at a time when their valuation has taken a massive hit because of the economic crisis triggered by the pandemic that originated in Wuhan nearly four months ago, the official said on condition of anonymity.
The revision of the foreign direct investment policy to prevent opportunistic takeovers also follows China’s central bank buying a 1.01% stake in HDFC in the first quarter of 2020.
Earlier, all investments from Pakistan and Bangladesh required the government’s approval for security reasons. The scope of this existing policy has been widened to cover all neighbouring countries that share a border with India, the official said quoting a government order.
Without naming China, the order issued by the department for promotion of industry and internal trade (DPIIT) on April 17 said the government had reviewed the foreign direct investment (FDI) policy “for curbing opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic” and amended the FDI policy.
“The change in policy will make it mandatory for all foreign investments from China, Pakistan and Bangladesh to go through the government’s scrutiny. So far, government permission was mandatory only for investments coming from Pakistan and Bangladesh,” the official cited above said.
According to the 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”.
Other than investments from countries that share a border with India, non-resident entities – foreign individuals or companies – can invest in India without the government’s approval except in sectors where FDI is restricted, the order said.
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.
India has 15,106.7 km of land border. The country shares land borders with Bangladesh (4,096.7 km) China (3,488 km), Pakistan (3,323 km), Nepal (1,751 km), Myanmar (1,643 km), Bhutan (699 km) and Afghanistan (106 km),but there are some exemptions for Nepal and Bhutan-based entities, the official said.
Experts said the takeover threat is not completely ill-founded.
Vikram Doshi, partner (tax and regulatory) at global consultancy firm PwC India said, “Covid-19 will impact several businesses, especially ones that are highly leveraged. It will open up takeover opportunities in many sectors.”
“This press note is an attempt to place a check and give the government an opportunity to review such takeovers and investments coming into India from specific jurisdictions,” he said.
Atul Pandey, partner in the law firm Khaitan & Co, said, “The notification by the government primarily intends to stem any attempts by Chinese firms to take control of Indian firms which have been affected and weakened by Covid-related lockdowns.”
He added, “Any fresh investments by Chinese firms or any transfer of investments by existing investors to Chinese firms will be covered under this notification, and will require government approval.”
Pandey said the government’s intention is clear in wanting to evaluate Chinese investments on a case-to-case basis. “However it is important to note that this notification will have the force of law once necessary amendments are introduced to the relevant FEMA [Foreign Exchange Management Act] regulations. Similar steps are being taken by the European Union and other jurisdictions like Australia,” he said.
Congress leader Rahul Gandhi appreciated the move in a tweet: “I thank the Govt. for taking note of my warning and amending the FDI norms to make it mandatory for Govt. approval in some specific cases.”
On April 12, he had cautioned the government against takeover threats. “The massive economic slowdown has weakened many Indian corporates making them attractive targets for takeovers. The Govt must not allow foreign interests to take control of any Indian corporate at this time of national crisis,” he had said.