India is one of the the latest countries to join the move to resist hostile business takeovers by China. Countries around the world have been tightening rules on foreign investments in critical sectors to ensure that their economies do not become vulnerable and exposed to foreign hands. As reports suggest that Beijing is on a buying spree owing to the coronavirus pandemic-induced economic downturn, the world as a whole, is reconsidering relations with China in the face of increased investment in critical sectors by Chinese state-owned enterprises. 

Issues

• China’s Stand: The additional barriers for investors from neighbouring countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment.
• India’s decision do not conform to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, transparent, predictable, and stable trade and investment environment, and to keep markets open.
• The principle of non-discrimination stipulates that a member shall not discriminate between products from different trading partners (giving them equally “most favoured-nation” or MFN status); and between its own and foreign products.
• India’s Stand: The amendments are not prohibiting investments, It has just changed the approval route for these investments. There are many sectors in India that are already subject to this approval route.
• India said countries like Germany, Australia and Spain have also tightened their foreign investment policies to prevent hostile takeovers by overseas investors.
• India’s move is seen as checking “opportunistic takeovers” of Indian firms hit by the ongoing Covid outbreak and lockdown.

Is India alone in implementing such restrictions?

• Globally, the COVID-19 pandemic has countries are now tightening the screws on hostile foreign takeovers at the time of the economic downturn. The European Union (EU) commission had recently issued guidelines to protect "critical assets from foreign investment". "Among the possible consequences of the current economic shock is an increased potential risk to strategic industries, in particular but by no means limited to healthcare-related industries." "There could be an increased risk of attempts to acquire healthcare capacities [for example for the productions of medical or protective equipment] or related industries such as research establishments [for instance developing vaccines] via foreign direct investment."
• European member states have also initiated curbs. Italy announced measures against "foreign takeovers" in sectors far-ranging as energy and insurance-healthcare. Germany is planning to curb “potential interference” in the country, and resisting domestic industry takeover from entities based outside the European Union. Spain has constituted new laws on FDI, requiring government authorisation.
• Canada introduced rules to ensure that "in-bound investment does not introduce new risks to Canada’s economy or national security, including the health and safety of Canadians”. 

What is the level of Chinese investment in India?

• Almost 18 of India's 23 unicorns have investments from China. According to a report by the thinktank Gateway House, China has remarkable investments in tech sector in India. "TikTok, the video app, has 200 million subscribers and has overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the US penetration of Facebook, Amazon and Google in India.
• Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72 per cent share, leaving Samsung and Apple behind," according to the report.
• The biggest issue pointed out by experts on Chinese investment is the country's lack of delineation between private and public entities. A lot of the private firms are backed by the Chinese state. 
• "The last decade has seen heavy investments from Chinese companies into India, over $5 billion in 2018," the report noted, highlighting the need to view these investments with caution.
• "They are in myriad sectors, such as consumer goods, especially electronics, logistics, retail, that is normal FDI mostly. Alarming are the investments by China’s powerful BAT companies [Baidu, Alibaba and Tencent] in soft power projects in India, Artificial Intelligence, the Internet of Things and fintech.
• That’s because the People’s Liberation Army of China and the Communist Party of China have a symbiotic relationship with China’s BAT, the makers of strategic domestic and overseas investments."

Current FDI Policy

• India’s FDI Policy allows foreign investment under the automatic route, with or without any limit and under Government Approval Route.
• 100 % FDI– India’s FDI policy allows 100 percent foreign investment under the automatic route in manufacturing, oil and gas, greenfield airports, construction, railway infrastructure sectors.
• Limited FDI– In other sectors, FDI is allowed under the automatic route upto a certain threshold, say 26 or 49 percent.
• Government Approval- Any foreign investment in defence, broadcast and print media, aviation and other sectors, requires government approval.
• Prohibited Sectors- There is also a list of prohibited sectors, such as lottery, cigarettes, atomic energy.
• The government has now narrowed the scope of of eligible investors.

Why FDI Policy has been modified 2020?

• The government has tightened its foreign direct investment (FDI) policy to restrict Neighboring Countries Firms from acquiring stake in Indian companies.
• The changes are made with protective positions taken by many other European countries and seem to be primarily aimed at restricting foreign investments from China, especially in critical industries.
• Even before the revision, investments from Bangladesh and Pakistan, which share borders with India, had to undergo government scrutiny.
• 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.

Presentation & Requests form Indian Companies.

• There has been several instances where Chinese investments in India were opposed by Indian companies and groups like RSS-affiliate Swadeshi Jagaran Manch (SJM) etc.
• 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.
• Recently, China’s central bank had increased its stake to 1.01 percent in Housing Development Finance Corporation Ltd. via the FPI route.
• 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 MSME.

What is the Major Change in FDI Policy in 2020?

• It has stated that entities from countries which share a land border with India will now be permitted to invest only under approval route.
• This restriction will also apply if the beneficial owner of the investment is an entity situated in or a citizen of such land border countries.
• The rules have been tightened not just for fresh but existing FDI as well.
• Transfer of ownership of any existing or future FDI where the direct or indirect beneficiary is from these countries will also require government approval.
• To be clear, the changes have been made only to foreign direct investment and not foreign portfolio investment (FPI) rules.

Which countries are  Land Border countries of India?

• India shares a land border with China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan.
• Even before the revision, investments from Bangladesh and Pakistan, which share borders with India, had to undergo government scrutiny.

What is foreign portfolio investment (FPI) rules ?

• Any investment of less than 10 percent of the total paid up capital of a listed company is treated as an FPI.

Effective date of Change in FDI Policy?

• The amendment in FDI Policy will take effect from the date of Foreign Exchange Management Act (FEMA) notification.

Issues in FDI Policy Amendment

• The government will need to issue certain clarifications for existing investments from restricted countries.
• It is doubtful if existing shareholders from Countries would be permitted to subscribe to a rights issue for maintaining their proportional shareholding in a company.
• Further, the position with respect to investments through special purpose vehicles is ambiguous.
• It needs to be seen whether beneficial ownership of less than 49 percent in restricted countries would suffice or the control would also need to be remain with persons from non-restricted countries.
• Additionally, it’s unclear if investments from Hong Kong would be differently or similarly treated to investments coming from China.
• For instance, rules on establishment of Branch or Project Office treat China and Hong Kong as different but for certain trade-related guidelines, they are treated the same.

Negative Aspect of Change in FDI Policy

• It neither distinguishes between greenfield and brownfield investments nor listed and unlisted companies.
• It also does not distinguish between the different types of investors, such as industry players, financial institutions, or venture capital funds.
• Such a blanket application could create unintended problems.
• For instance, it is likely that unlisted or private companies might find themselves under financial stress due to the COVID-19 pandemic. 
• Greenfield investments are another category where the new rules may pose obstacles. These are investments where Chinese investors bring fresh capital to establish new factories and generate employment in India.
• 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.