India has recently made revisions to its Foreign Direct Investment (FDI) policy, necessitating government approval for FDIs from neighbouring countries. This measure aims to stem the tide of hostile takeovers or acquisitions of Indian companies arising from the current Covid-19 pandemic situation.
Changes in FDI Policy
FDI in India is permitted via two routes. The automatic route, where companies do not need government approval, and the government route that requires a green signal from the central administration.
Under the revised FDI policy, entities from a country sharing a land border with India or those whose beneficial owner is situated or is a citizen of such a country can invest only under the government route. This extends to ownership transfers in FDI deals benefiting any country bordering India. The countries in this list include Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh, and Myanmar.
Investors from countries not encompassed by the new policy merely need to inform the Reserve Bank of India (RBI) post-transaction, bypassing government department approval.
The Impact of the New FDI Policy
The previous FDI policy only mandated permission through the government route for Bangladesh and Pakistan across all sectors. The updated rule includes companies from China under the government route provision.
Chinese influence in the Indian business sector has been rapidly growing, most noticeably since 2014. The net Chinese investment in India increased from $1.6 billion in 2014 to at least $8 billion in the following three years. This growth was marked by a shift from state-driven to market-driven investments by the Chinese private sector.
Discrepancies in Official Figures
Official figures may not entirely represent the actual amount of investment. These numbers do not account for all acquisitions of stakes in the technology sector by Chinese companies nor investments from China routed through third-party countries like Singapore.
An example which illustrates this point is the $504-million investment from Xiaomi’s Singapore branch, which does not reflect in official statistics due to the method of recording investments.
Chinese firms have managed to avoid the scrutiny in India that their investments have elicited in the West despite making several high-profile investments and acquisitions. Also, there is no clear demarcation between Chinese private business and the state, as they work together towards achieving mutual objectives.
Understanding FDI
FDI is a type of investment made by a party in one country into a business or corporation in another country with an aim to establish lasting interest. This distinguishes FDIs from foreign portfolio investments, where investors passively hold securities from another country.
FDI can be made either by expanding a business into a foreign country or by becoming the owner of a company in another country. The amendments to the FDI policy in India are aimed at balancing the scale between sustaining foreign investments and protecting domestic companies from opportunistic takeovers or acquisitions amidst the Covid-19 pandemic.