On Saturday, the Ministry of Finance and Industry issued a Press Note 3 wherein it informed that Foreign Direct Investment (FDI) from countries that share a border with India will only be allowed after Government approval.
The new rules imply that government approval will also be required for the transfer of ownership of any existing or future investment in India. The amendment to the extant FDI policy has been made in light of the opportunistic investments and acquisitions by Chinese firms.
As per the new amendment, FDI investments into Indian companies from the neighbouring countries will now require a nod from the government. This will be applicable to all countries that share a land border with India, which includes China.
The amendment states, “A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, 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.” Although the amendment is applicable for all countries that share land border with India, it is seen as mainly targeting China, as Chinese companies have started a buying spree across the globe amid the Coronavirus crisis.
Earlier, investment from China was permitted through the automatic except for certain sectors such as Telecom, Defence etc. It is important to mention that China had invested in several Indian startups such as PayTM and Flipkart in the past. Interestingly, 16 Chinese Foreign Portfolio Investments (FPI) of $1.1 billion are registered in India. As of December 2019, historical investments from China stand at $2.3 billion.
Scrutiny of Chinese Investment Tightened
The market regulator Securities and Exchange Board of India (SEBI) has also issued fresh communication to custodians seeking details of investments specifically coming from China or through China into Indian stock markets. According to the reports, the SEBI has asked custodian banks to disclose details of ‘ultimate beneficial owners’ of foreign portfolio investors (FPIs) based in China and Hong Kong.
The communication to custodians said, “Urgently provide a list of FPIs whose beneficial owner is from China and list of FPIs whose beneficial owner is from Hong Kong.” SEBI’s initial intent was to increase checks of only new FPIs coming from China and other neighbours of India. With Chinese investments entering into Indian markets, the SEBI is now cautioned and has now changed its focus to existing investments as well.
The direction issued by SEBI to custodians came as an immediate reaction to People’s Bank of China (PBOC) buying a little above 1% stakes in HDFC. The People’s Bank of China (PBoC) purchased 1.75 crore shares of HDFC. HDFC is one of India’s leading housing finance company and traditionally considered as one of the blue-chip stocks by most institutional investors.