India blocks automatic FDI from neighbouring countries to prevent ‘hostile’ takeovers

India has revised its FDI policy and made it mandatory for all foreign investments from neighbouring countries that share land borders with India like China, Pakistan, Bangladesh, subject to government clearance. This tightening of the FDI policy has come after China has tried to acquire distressed assets in key sectors in other countries as businesses are already suffering from the financial fallout of the coronavirus pandemic. Therefore, India is following Australia, the European Union, Germany, France, Spain, and Italy, that have already taken measures to counter this move by tightening their foreign investment rules. By doing so, India wants to prevent any opportunistic takeovers or acquisition of Indian companies due to the COVID-19 pandemic.

Also, according to the notification issued by the Department for Promotion of Industry and Internal Trade, transfer of ownership of any existing entity or future FDI in an entity in India, directly or indirectly, resulting in beneficial ownership falling within this restriction will require mandatory government approval.

Essentially, investors from India’s neighbouring countries will need prior approval of the Indian government in order to make investments in India.

Revised FDI policy: India vs China

The revision in the FDI policy is partly due the use of different destinations and various instruments that China uses to route investments. This also makes it difficult for India to determine the exact amount of investments made by China so far. According to some sources, China is believed to have invested $8 billion between April 2000 – December 2019. But according to a Brookings report, investments by China could be to the tune of $26 billion. It is this lack of transparency that may have pushed the government into a panic mode, further triggered by the COVID-19 crisis. Securities and Exchange Board of India is also investigating the level of control Chinese firms have in the investee companies. These steps only allude to more stringent provisions in the future.

The move has invited heated responses from China's representatives in India. "The impact of the policy on Chinese investors is clear. The additional barriers set by the Indian side for investors from specific countries violate WTO's principle of non-discrimination and goes against the general trend of liberalisation and facilitation of trade and investment. More importantly, they 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," said Chinese embassy spokesperson counsellor Ji Rong.

India stays firm on its policy change: "[FDI policy revision] does not violate any WTO guideline in anyway. We are well within our rights to formulate or tweak any policy," says a senior government official.

Although there is some concern about the new FDI policy restrictions damaging the bilateral trade relations as well as hampering FDI from China, since the revision of the FDI policy seems like a temporary move to protect India’s economic stability and security during the pandemic outbreak, just being a screening process to determine the implications of the investment (and not a total ban), the investments will not be affected in the long run. Moreover, non-problematic Chinese investment are expected to be cleared by the government easily.

Also, per a report by Reuters, some Chinese firms concern that such scrutiny will affect their projects and delay deals in one of Asia’s most lucrative investment markets, does not seem to have many takers in practice. According to one of the sources who works closely with Chinese automakers in India, “sentiment wise it’s not been taken well but it will not change the investment plans for now”. The new FDI policy may affect liquidity in Indian firms that are backed by leading Chinese investors like Alibaba, Tencent, and Ant Financial temporarily, it is highly unlikely that China will stop investing in India.

Are you looking to invest in India from China, Pakistan or Bangladesh and want to know the possibilities in your specific case? Please get in touch with our experts at Miss Legal India.