Revised India’s Foreign Policy to curb Chinese takeovers

In the last couple of months, India and China have had quite a strenuous relationship. In the midst of this, the Covid-19 has plagued the world and has brought in disastrous consequences for economies. Every country is grappling with economic implications and India, being no exception has aimed to take a protective stand by implementing the recent FDI norms.

Foreign direct investment is basically is an investment from a party (firm/individual) in one country into a business or corporation in another country with the intention of establishing a lasting interest.

Recently, the government of India’s change in FDI norms seem to be a policy intervention directed at China. Through its Press Note No. 3(2020 Series), it has stated that the restrictions which were applied to Bangladesh and Pakistan before, i.e. that government clearance has to be taken, before they can invest, are now being extended to China as well. India has changed its foreign policy and brought in stricter measures to curb the takeover of Indian companies by the opportunistic tendencies of Chinese firms, due to the current Covid-19 pandemic. 

Key Changes 

Under the new and amended policy, the company/ individual wanting to invest must in an Indian company through acquisition or transferring of the same, either by direct or indirect mode, has to take a prior approval of the government. This is however applicable only to such investors, acquirers or beneficial owners who are based out of a country which is sharing borders with India. Such approval is mandatory in nature and cannot be exempted. The prior approval thus is extending to;

1. Investments where the beneficial ownership is situated outside the jurisdiction of India. The beneficial owner can be a corporate or an individual.

2. A direct or indirect transfer of ownership of any existing or future investment, which results in the beneficial owner being from a Restricted Country.

This thus makes companies who are based in China, Pakistan, Afghanistan, Bhutan, Myanmar and Nepal to compulsorily abide by the guidelines if they want to invest in India.

Ket Takeaways 

1. Impact on Committed deals and Transactions

The change in transactions which were already in existence could be significantly impacted. Though these deals may be definitive in nature, in some cases, completion could not have taken place. It is difficult to assess whether for completion of such deals, a prior approval is required by the government. 

2. Beneficial Interest 

There is no clearance on what the term beneficial interest means. In the press note, there were no indications as to how this term would be construed. Further, many equity firms in India have investors who are Chinese financial institutions and companies who are acting in the capacity of limited partners. 

3. Duration of Amendment not Provided 

In the press note, the revised FDI policy does not state whether it is an interim measure or a total change in the outlook of FDI. Though the outline of the press note states that it is due to the factors and market conditions resulting from the pandemic, it is unclear whether it is a temporary measure of the government to keep its neighbour China in check.

4. Applicability 

The changes and modifications in the FDI policy would not be applicable to the investments made in the public securities market. This means the foreign portfolio market (FPI) will remain unchanged. 

India's FDI Policy and China 

According to a recent survey, the cumulative investment of China is far more than the total investments of all the other countries which share a border with India. China is trying to assert its dominance in South Asia by investing in Sri Lanka, Pakistan, Nepal and Maldives. China recently acquired the Hambantota Port and the surrounding land for 99 years from the Sri Lankan government, after struggling to repay debts. These acquisitions not only assert the regional dominance of China but also are a great threat to Indian security. 

A clamp down on investment particularly coming from China may have a dilapidating consequence on future investments in such companies. Unlike India, where the majority of the companies are under the private sector, in China, major companies are under the Chinese government’s rule even though they are in the private sector. The major concern for the Indian government is that China is increasingly investing in the businesses of tomorrow.

An important question arises as to whether India has committed any wrong under the International law as claimed by China. 

1. China has alleged that India’s actions are contrary to the principles of WTO. However, the WTO has never regulated FDI of a country. World Trade Organisation's multilateral agreements regulate the trade of goods and services between different countries. 

2. Multilateral agreements such as WTO agreements have an extraordinary measure clause in them. This clause is often resorted to by the countries in case of grave emergencies when they are unable to fulfil their obligations. Covid-19 is a global pandemic and an emergency and in such cases, countries are permitted to protect their security interests. 

3. FDI related disputes are bilateral in nature. China, if and when it has a problem, should use the channels of diplomacy rather than evoke international agreements and international forums. 

4. The measures taken by the Indian government are in consonance with the guidelines of European commission.  

India is steadily moving towards the path of challenging China as the regional aggressor of South Asia. India, in times of such emergencies, is unlikely to be bullied by China through its lucrative investments. It has strengthened the bargaining arm of India. Through restricting the entry of FDI, it is acting pre-emptively. In times when manufacturing companies are eyeing for alternatives away from China, strengthening the economy is the forefront goal of the government. Through the series of actions taken by the Government of India, it seems that it wants to remain at the forefront of being looked as an alternative to China.