India: FDI and China
Updated: May 17, 2020
On April 17th, 2020, the Government of India revised it’s FDI Policy to curb hostile takeovers of Indian enterprises. A predatory move towards the Chinese trade and administration in light of the global pandemic. But before understanding why such a move was carried out, we must understand the economic component that is FDI.
An FDI (foreign direct investment) is an investment made by a firm or an individual located in a base country into another country where the individual or firm has business interests. It benefits both the home country and the recipient country. However, it is different from purchasing equity shares of the enterprises. A foreign direct investment leads to substantial control or influence over the enterprise by the firm or individual investing in it if more than 10 percent of the ownership stake lies with the investor.
India’s previous FDI policy states: “A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy, and sectors/activities prohibited for foreign investment.”
Whereas the current FDI policy states: “A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares a 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. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy, and sectors/activities prohibited for foreign investment.”
The devil lies in the details here. The Indian government has included China in the list of countries that require the approval of the Union for purposes of investment within the country. The decision was inspired by the actions of the People’s Bank of China when it decided to increase its stake within HDFC from 0.8 percent to 1.01 percent.
However, India’s move to revise the policy doesn’t come off as very surprising given the current political climate.
China has lately been following the method of Brownfield Investment. This is when an entity or individual acquires an enterprise based in a different country. Global leaders and diplomats have not used such kind words to describe China's actions and have rather used terms like "bargain hunting" in the time of an economic slowdown. The European Union followed by several other nations like Canada, the UK, and the USA has strengthened takeover policies. The reason why India has managed to excite a response from Beijing is that they have gone to a particular length to curb Chinese influence within the country.
Amidst the revision, we have seen the emergence of two sides. The side which condemns the policy change, calling it discriminatory and the side which supports it, calling it just and fair. There have been numerous questions raised by both sides but the one which needs recognition the most is, "Will revision ensure relief?"
To elaborate, will it ensure that there will be no hostile takeovers or will it kill the enterprises that need the support of Chinese investment, furthering the economic slowdown? As common men and women, it is something that we can only anticipate.
Author : Ritwik Chakravarthy