At a time when there are growing concerns that China is using its financial might to buy distressed assets across the globe, the Indian government seems to had added a bureaucratic layer of control over China’s investments and acquisitions in India; this layer will act as a restriction, since previously, such investments were possible via “the automatic route”, and largely unimpeded.

Does it target China? The Press Note doesn’t specifically mention China, but refers to investments from countries with land borders with India, which means, given China’s size and investments in India, that it targets China.

What has changed? The Press Note 3 (2020 Series) from India’s Department for Promotion of Industry and Internal Trade, FDI Policy Section, amends India’s FDI Policy to bring about two key changes:

  • Investment: An entity in a country which shares a land border with India, or where the beneficial owner of an investment in India is situated in or is a citizen of such a country, can only invest in India via approvals from the Indian government.
  • Acquisition: In the event of a transfer of ownership of any existing of future FDI in an entity in India, directly or indirectly, will also require government approval.

The Pakistan clause has been retained: a citizen of Pakistan or an entity incorporated in Pakistan cannot invest in India in defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Previously:

  • A Bangladesh clause: A citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
  • A Pakistan clause: 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.

China Reacts (updated)

The Chinese Embassy in India has reacted strongly to this change: In a statement, Ji Rong, the spokeperson for the Chinese Embassy in India has pointed out the following:

  • The impact on Chinese investors: Chinese investment in India “has exceeded 8 billion US dollars, far more than the total investments of India’s other border-sharing countries. The impact of the policy on Chinese investors is clear”.
  • Violation of WTO’s principles: “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 liberalization and facilitation of trade and investment.”
  • The policy does “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 our markets open”
  • Revise the policy: “We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment.

What triggered this change?

The intent, clearly, is to curb “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.”

There is a fear that given the global economic meltdown, fallen stock markets, and the increase in distressed assets, China, through its state owned companies and investment arms, might look at opportunistic purchases in strategic interests in various countries.

  • The key trigger: The alarm bells rang after the People’s Bank of China increased its shareholding in HDFC Bank, one of India’s largest private sector banks, to 1.01%, between January and March 2020.
  • Following an uproar by British legislators, an arm of the Chinese state-owned investment firm China Reform had to abandon its bid to dominate Imagination, a leading British technology firm that makes smartphone chips, reports Foreign Policy.
  • The European Commission has issued guidelines to protect critical European assets and technology in current crisis
  • Fears regarding acquisitions in other countries. More on Italy and Germany.

Will Indian Internet entrepreneurs welcome this change?

Allowing investment in a business is essentially a tradeoff: you give up control of your business, in exchange for money to grow your business. Entrepreneurs ideally want the money, but also want complete control. This is why there was a strong push from Indian entrepreneurs for differential voting rights.

This additional restriction on investment will have the following impact:

  • Slow down in the pace of investment from Chinese companies in India, because of the bureaucratic layer being added. The additional layer of scrutiny on every investment might also make Chinese investors vary of investing in India.
  • A new trade issue: This will, without doubt, become a trade issue eventually, and China will seek its relaxation in exchange for some concessions in the future. Perhaps a relaxation of sorts might eventually be in the offing (applicable to investments over x% or x amount, for example).
  • New investments? Those with investment from Chinese companies will look to add investors from other geographies, given that Indian investors typically do not/cannot invest at unicorn-scale.

Who will this impact?

Investments from China in India have largely mirrored successful businesses in India. TikTok and Xiaomi are probably the only key greenfield Chinese investments to have achieved significant scale in India. Tencent’s initial investments in India failed miserably: Tencent’s investment in MIH India (Ibibo) was among the stories that MediaNama launched with in 2008, and it never exercised the option to take over 50% of MIH India-Naspers owned Ibibo, eventually separating in 2013 (all the details here).

According to Gateway House, more than half of India’s 30 pre-COVID19 unicorns have a Chinese investor (PDF). Over 75 Indian companies, with Chinese investors concentrated in e-commerce, fintech, media/social media, aggregation services and logistics, according to their November 2019 report, with investments in Sharechat, Paytm, Paytm Mall, Byjus, Gaana, Hike, MX Player, Snapdeal, Zomato, Dream11, Swiggy, Udaan, Practo, Bigbasket, DailyHunt, ZestMoney, Mygate, Ola, Oyo, PolicyBazaar, Quickr, Delhivery and others. CTrip owns almost half of India’s largest online travel company MakeMyTrip.

India’s tech startup ecosystem was, for a long time, a US vs China battleground. A Tiger Global vs Softbank battle became a Tiger Global vs Softbank+Alibaba battle, and eventually became a Softbank+Alibaba vs Tencent battle: mostly a Chinese battleground, even in case of online gambling.

This is set to change.