Centre has tightened its foreign direct investment (FDI) policy to restrict Chinese firms from acquiring stake in Indian companies.

In a press note issued on April 17, the Department for Promotion of Industry and Internal Trade (DPIIT) has said the revision of the FDI policy is meant to curb "opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic". The fact that the revision is specifically meant to have a control on FDI from entities or citizens of any country that shares land borders with India makes China its prime target.

Of late there has been several instances where Chinese investments in India were opposed by Indian companies and groups like RSS-affiliate Swadeshi Jagaran Manch (SJM). People's Bank of China's investment in HDFC, the promoter entity of HDFC Bank, to raise its stake to one per cent early this month had resulted in lot of hue and cry from various quarters. The fear is partly due to the concerns arising from other countries where Chinese investments in the time of COVID-19 are seen as an attempt to take over national assets at a time of crisis.

The tweaked portion of the FDI policy states that a non-resident entity "of a country, which shares 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" with prior government permission. India has opened up most of the sectors for FDI investments through automatic route, but has kept certain sectors like defence, space and atomic energy restricted or prohibited. Even before the revision, investments from Bangladesh and Pakistan, which share borders with India, had to undergo government scrutiny. By expanding this restriction to all countries sharing borders with India, the government has now ruled out investments from China, direct or surrogate, without scrutiny.

The revised position also mentions that government's nod is required for every type of FDI - green field or brown field - as it says that for any transfer of ownership to these entities, subsequent change in beneficial ownership will require government approval.

Associations representing MSMEs have been urging government to stop Chinese investments into domestic firms. There is an increasing interest among Chinese firms to invest in Indian MSMEs as the changing global supply chain dynamics - which began to gather strength in face of retaliatory tariffs during the US-China trade war - necessitate alternate supply sources to serve global locations. Indian MSMEs in engineering sector have been seen as an attractive target for such firms.

A legal expert said that the government decision will have a lot of downside too. According to him, the restrictions on green field investments will impact India's Make in India plans as the country has been wooing Chinese firms like mobile manufacturers to set shop in the country and reduce imports from China.

"There are no exemptions allowed either. For example, what happens to AIDs and other funds that has elements of Chinese investments? Beneficial ownership test is a difficult one. Approvals are going to take significant amounts of time", the expert said.

India has been increasingly becoming an attractive destination for Chinese investors. China investments in India spans across sectors with significant ones in mobile and related technologies and products, automobiles, and financial technologies. Indian start up ecosystem is also seeing lot of Chinese investments.

The decision will be a dampener for all such initiatives, but will allow India to be one among several other countries that are resisting Chinese investments and acquisitions in times of novel coronavirus pandemic.

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