Alarmed by the People's Bank of China (PBoC) raising its stake in India's largest non-banking mortgage provider HDFC, the central government has now revised India's Foreign Direct Investment (FDI) policy. With respect to the revised FDI policy, investments from China will now require a clearance from the Centre.

Sources tell India Today that the FDI policy was revised to curb opportunistic takeovers or acquisitions of Indian companies in the aftermath of the novel coronavirus outbreak and the economic crisis it has brought about. The Centre faced sharp criticism over the fact that no alarm bells were raised when China's central bank raised its stake in HDFC from 0.8 per cent to 1.01 per cent. In its defence, HDFC had cited that the existing rules only required disclosure when a foreign entity raised its stake beyond 1 per cent.

The amendment to the FDI rule 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 investment into India is situated in or is a citizen of any such country, can invest only under the Government route."

In addition, the Centre has made another significant change in the FDI policy by blocking the indirect acquisition of investments by entities based in China. Now, change in ownership of the investment will also have to be cleared by the Union government.

The revised rule says, "In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval."

Interestingly, the central government has refrained from naming China in the amended policy and instead opted to end free access to entities based in China by referring to it as "country which shares a land border with India". Investors based in Pakistan and Bangladesh are already covered under the same rule.

Earlier, the FDI policy said, "Para 3.1.1: 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 defence, space, atomic energy and sectors/activities prohibited for foreign investment."

PBoC's purchase of 1.75 crore shares in HDFC

The Chinese Central Bank had bought 1,74,92,909 crore shares equivalent to 1.01 per cent of the shareholding of HDFC. The share purchase is said to have happened between January and March 2020. The timing of the PBoC raising its interest in India's largest non-banking mortgage provider raised serious concerns since HDFC shares have been sliding due to the economic disruption caused by the pandemic.

During the same period, India's benchmark equity index, Sensex had lost 25 per cent while 50-share Nifty had closed down by 26 per cent. Experts and the government were worried that Chinese entities would take advantage of the economic slump caused by the Covid-19 outbreak to raise their stakes in Indian entities and companies, exposing them to hostile and opportunistic takeovers.