Foreign investments with even a whiff of Chinese involvement will need approvals from the Indian government. The Indian government has abandoned its plan to set a threshold for Chinese foreign direct investment (FDI), meaning every proposal will have to be okayed by the government, irrespective of size or percentage stake, reported Times of India.
Chinese FDI in Indian companies has attracted considerable attention in recent months. At the beginning of the COVID-19 pandemic in April, the government amended its FDI policies to introduce bureaucratic hurdles for companies from countries that share a border with India if they wish to invest in Indian assets. It was amply clear that the target country for this policy was China, for fear that Chinese state-owned companies try to take advantage of the economic meltdown brought on by the pandemic to buy strategic interests in India. However, at the time, the government was reportedly considering setting a threshold limit below which approvals wouldn’t be necessary. This threshold was to be decided based on provisions in Companies Act and the Prevention of Money Laundering Act.
However, an unnamed official told Times of India that a threshold limit is not being set. Hence, proposals with even a small amount of Chinese investment will have to undergo scrutiny.
‘Significant beneficial ownership’ approach ditched
The proposed threshold limit was to be set in a way to the rules on the basis of the “significant beneficial ownership” principle. In India, the principle has been put in place as part of Companies (Significant Beneficial Owners) Rules, 2019, which is supposed to help identify the real ownership of companies. The Rules make it mandatory for companies to declare their ownership structures in a more transparent manner.
In context of FDI, a beneficial ownership threshold would have helped the government trace investments by Chinese companies, many of which are routed through private equity (PE) and venture capital (VC) funds headquartered in tax-havens such as Mauritius and Singapore (for instance: SEBI’s website lists at least 42 registered foreign venture capital investors from the country).
However, it seems the government has ditched this approach altogether, and has opted for an even stricter FDI regime.
TOI also reported that Hong Kong (technically a part of China) and Taiwan (over which China claims sovereignty) are expected to be exempt from mandatory clearances. The guidelines, being prepared by an inter-ministerial group, are expected to be finalised in the coming days.
Increasing Chinese investment in Indian startups
Chinese investments are a major part of the Indian startup ecosystem. According to a report by Gateway House from March 2020, Chinese tech investors have put in $4 billion into Indian startups — 18 of India’s 30 unicorns are funded by Chinese companies. These include BigBasket, Byju’s, Flipkart, Hike, MakeMyTrip, Ola, Paytm, PolicyBazaar, Swiggy, and Zomato.
However, of late, the Indian state has signalled discomfort with this situation. A few months ago, Indian and Chinese troops clashed on the Line of Actual Control in the Ladakh region. Soon after, the government banned as many as 224 Chinese-owned mobile apps, including popular apps like PUBG, TikTok and WeChat, citing national security reasons. It is also reportedly considering the same approach to fintech companies with links to China, adding app-based lenders to its list of banned entities. The government fears the potential compromise of sensitive data of Indian citizens from these companies.
The government has also set up a screening panel to vet FDI proposals from China, according to an Economic Times report from earlier this month. More than 100 Chinese investment proposals are said to be pending.
- Press Note 3 of 2020: FDI policy and the expanding sphere of national security
- How will the restriction on Chinese investments affect the Indian Internet ecosystem?
- Govt sets up screening panel to vet Chinese FDI proposals: Report
- RBI prohibits finance companies to be set up with FDI from Mauritius: Report