The government made its prior approval mandatory for foreign investments from countries that share land borders with India to curb “opportunistic takeovers” of domestic firms following the COVID-19 pandemic, a move which will restrict FDI from China.

Countries which share land borders with India are China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.

The decision would restrict foreign investments from China amid fears that companies in the neighbouring country might make takeover bids at a time when domestic firms are battling lockdown imposed to contain rapid spread of coronavirus.

Chinese central bank — People’s Bank of China — has recently hiked its stake in mortgage lender HDFC Ltd to 1.01 per cent.

FDI in India

According to the Department for promotion of Industry and Internal Trade (DPIIT) data, India received FDI from China worth $2.34 billion (Rs 14,846 crore) between April 2000 and December 2019. During the same period, India has attracted Rs 48 lakh from Bangladesh, Rs 18.18 crore from Nepal, Rs 35.78 crore from Myanmar, and Rs 16.42 crore from Afghanistan. There are no investments from Pakistan and Bhutan.

Although FDI is allowed through an automatic route in most of the sectors, certain areas such as defence, telecom, media, pharmaceuticals and insurance, government approval is required for foreign investors.

Under the government route, foreign investor has to take prior approval of the respective ministry/department. Through an automatic approval route, the investor just has to inform the RBI after the investment is made.

There are nine sectors where FDI is prohibited and that includes lottery business, gambling and betting, chit funds, Nidhi company, real estate business, and manufacturing of cigars, cheroots, cigarillos and cigarettes using tobacco.

During April-December 2019-20, FDI into India increased by 10 per cent to $36.77 billion.

What is the main change in FDI policy?

“An 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 under the government route,” according to a press note issued by the DPIIT.

It said that the government has amended the FDI (foreign direct investment) policy to curb “opportunistic takeovers/acquisitions” of Indian companies on account of COVID-19 pandemic.

It also said that government approval will be mandatory for any transfer of ownership of any existing or future FDI in a company in India, which results in change in beneficial ownership, falling under this new restriction.

“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 or purview of the (amended policy), such subsequent change in beneficial ownership will also require government approval,” it said.

Currently such a norm was there for investments coming from Pakistan. A company  can invest in India, subject to the FDI policy except in those sectors/activities which are prohibited.

“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,” it added.

How China reacted to the amendment?

Chinese embassy spokesperson said that India’s new norms for foreign direct investment from specific countries violate the WTO’s principle of non-discrimination and are against the general trend of free trade.

The official said the new policy introducing “additional barriers” was also against the consensus arrived at the G20 grouping to realize a free, fair, non-discriminatory and transparent environment for investment.

“The additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment,” Chinese embassy spokesperson Ji Rong said in a statement. 

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