Playing the Punt: The New Roadmap of India’s FDI Policies
Updated: Jul 4, 2020
A couple of days after the Ministry of Commerce and Industry amended India’s FDI policy section via Press Note 3, the Indian Prime Minister, Narendra Modi, held a cabinet meeting to plan and execute strategies in order to boost foreign direct investment in the country, post the pandemic. The two strikingly opposite moves have aroused mixed reactions from stakeholders, analysts, and the general public.
A Background
Ever since 2014, the influx of Chinese investments in the Indian capital markets has grown multifold, most likely exceeding 6.2 billion USD, as of February 2020. The neighbor has invested in almost two- thirds of Indian startups valued at over 1 million USD, including Paytm, BigBasket, Byjus, Zomato, Ola, and Flipkart, to name a few. The last few years have witnessed excessive ingrained Chinese capital in a multitude of sectors ranging from e-commerce to information technology and electrical equipment, from investment giants such as the Alibaba Group, Tencent, and the Steadview Capital. Although, China’s FDI to India is a mere 0.51 percent of the total inflows, yet, it is considered to be one of the fastest-growing foreign portfolios in the country.
Pressing the Press Note 3 Button
On April 17, the government of India revised its FDI policy in order to curb ‘opportunistic takeovers and/or acquisitions of Indian companies', in lieu of the global COVID pandemic. The amendment states that firms in neighboring countries, which share a land border with India, can now invest in Indian companies only after approval by the GOI. This equally applies to ‘beneficial owners’- even if the investing company is in a neighboring country, it would still fall under this category if its owner is a resident/ citizen of such a country.
The move came hard on the heels after the People’s Bank of China acquired a 1% stakeholding in Indian mortgage and banking firm, HDFC Ltd, and is widely being considered as an effort to counter any potential Chinese business takeovers in India. This advance has several implications for India’s trade, diplomacy, and security strategies.
Counting on the Consequences
In the present scenario, Press Note 3 has several unclarified terms, which are subject to different connotations, in the absence of government clarifications. The ambit of the amendment is wide enough to cover a multitude of investment proposals and make them susceptible to scrutiny. The PN3 is unclear on several aspects of the definition of land-border nations, beneficial ownership threshold, the approval process, and conflict resolution. It would be interesting to see how the government deals with capital funding agreements by investor companies having multilayered structures, several owners with distinct nationalities and diverse functioning, spread across several jurisdictions.
China has strongly condemned the move, terming it as discriminatory and a back turn on the ‘free and fair trade’ principles, established and upheld by the World Trade Organization (WTO). It hopes that India will revise the biased policy amendment and foster a fair and equitable business environment. The Indian side was quick to respond and clarified that Press Note 3 only altered the approval process for FDI, and doesn’t bar any such kind of investment.
The amendment received vast support from analysts, who felt that India’s growing dependence on China’s supply chains and the deep-rooted entrenchment of Chinese investments in Indian capital markets must be curbed. A national security interest in the same has gained the attention of the public, especially after the month-long standoff between the armies of the two nations in Ladakh and Sikkim. Amidst massive support, dawns a scream of criticism by companies and startups who were eyeing the inflow of foreign capital, to support their businesses, which have hit the rock bottom after the COVID crisis. They have countered the aforementioned arguments on the pretext of rapid business growth due to foreign investment and the creation of jobs, in a situation deteriorated by the pandemic and the pre-pandemic economic slowdown.
The Way Forward
PN3 is the first step in the direction of insulating the Indian economy and financial markets from Chinese exposure. However, in order to ensure that this new roadmap does not hinder capital funding for corporates and businesses or creates confusion regarding which entities will be subjected to this jurisdiction, further statements from the government will be awaited.
A passionate linguist and actor, Alisha is your go to person for advice. Pragmatic and amiable, she is a mountain child who finds tremendous solace in coffee and films!
