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FDI Policy change and Government Initiatives

Search 19th April, 2020 Spotlight here: http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx 

TOPIC: 

General Studies 2

• Government Policies on trade

General Studies 3

• Economy - FDI

In News: The government has notified changes to the foreign direct investment (FDI) policy and put into effect the requirement of prior clearance for investments from countries with which India shares its land border. 

An entity of a country that shares a land border with India can now invest in firms here “only under the Government route”. This also applies to “beneficial” owners — even if the investing company is not located in a neighbouring country, it would still be subject to these conditions if its owner is a citizen or resident of such a country.

Objective: To curb opportunistic takeover due to the Covid-19 pandemic, especially from China 

• Provides safety net for Indian Companies: Economic slowdown due to COVID-19 has led to decreased valuation of firms making it vulnerable to hostile takeover by other
• Fear of Chinese domination: The Chinese have already restarted manufacturing when the rest of the world still grappling with coronavirus thus giving them several months’ advantage

Background

The move comes amid reports of China trying to acquire distressed assets in strategic sectors globally, with companies seeing a substantial fall in their valuations because of the containment measures to rein in the pandemic. In fact, Australia and the European Union have also taken measures to counter the Chinese move. A Brookings India paper pegs the total current and planned Chinese investment in India at over $26 billion.

However, India’s decision may come in the way of home-grown unicorns and startups that aim to expand their businesses. At least 18 of the 23 Indian unicorns, including Paytm, Snapdeal, OYO Rooms, Ola, Swiggy, Zomato, and BigBasket, are backed by Chinese investors such as Alibaba, Tencent and Ant Financial.

The new FDI norms may force these investors to postpone or even stop these funds from topping up their investments or respecting the agreed term sheets. Therefore, the unicorns, which depend on their largest investors to keep the cash flowing, may now have to start looking for new anchor investors. Growth-stage startups may also see investments drying up.

So, has the Government banned foreign investment from China?

The government has not banned foreign investment from China. It has only put a filter to have an oversight to examine the implications of the investment, alarmed by the People’s Bank of China raising its stake in the country’s largest mortgage lender, HDFC Ltd, from 0.8% to 1.01% through open-market purchases in the March quarter. The move led to concerns that India’s most valued companies could be susceptible to hostile takeovers as their market values have taken a severe hit because of covid-19-related uncertainties. This has led to India now talking about legal vetting of not just direct ownership but also beneficial ownership.

What was China’s response?

China has called for India to revise these “discriminatory practices” and treat investments from different countries equally. The additional barriers set by Indian side for investors from specific countries violate WTO’s (World Trade Organization) principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment. More importantly, they do not conform to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.

Is this the first time that India has resisted possible Chinese aggression in trade?

• Had refused to join the China-led Belt and Road Initiative despite, citing security reasons. 
• Had allowed Huawei to participate in the 5G trial only after much deliberation
• Had blocked certain FDI investments during bilateral standoffs with China

The Way Forward

The govt should lay out a clear road map for the approval process for investments from Chinese firms by –

• Setting some rules about Chinese investments in strategic assets and protecting investments into startups. 
• To curb the growing distrust between the Chinese investors and Indian regulators, the government could have allowed a Category I and II Alternative Investment Funds to raise money from China to support the startups here, as they are not after management control.
• It should ensure that proposals are considered in a time-bound manner and restrictions should not have any adverse impact on bonafide investments in these challenging times, wherein Indian companies are in need of funds

About Ordinance: 

• Ordinances are laws that are promulgated by the President of India on the recommendation of the Union Cabinet, which will have the same effect as an Act of Parliament. 
• They can only be issued when Parliament is not in session. 
• They enable the Indian government to take immediate legislative action

Foreign direct investment (FDI)

• Investment from a party in one country into a business or corporation in another country 
• Foreign direct investment can be made by expanding one’s business into a foreign country or by becoming the owner of a company in another country.

India’s FDI policy

• A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
• India’s FDI policy allows foreign investment in certain sectors under the automatic route. 
• 100% FDI is permitted under the automatic route in manufacturing, oil and gas, greenfield airports, construction, railway infrastructure etc. 
• In other sectors, FDI is allowed under the automatic route upto a certain threshold, say 26% or 49%.
• Such conditions apply to defence, broadcast and print media, aviation and other sectors. 
• There is also a list of prohibited sectors, such as lottery, cigarettes, atomic energy where FDI is not permitted. 

India’s neighbouring countries: India shares a land border with: 

• China
• Pakistan 
• Bangladesh
• Nepal 
• Myanmar
• Bhutan 
• Afghanistan

Connecting the Dots:

1. The change in FDI rule could potentially end the growth of the booming startup ecosystem in India. Comment.
2. Why has India tightened FDI rules? List out pros vs cons.
3. The action signals India’s intent of not separating commerce and security in dealing with China Do you agree?