How Chinese central bank’s move in HDFC alerted New Delhi to tighten rules

Logically, the tensions on the India-China border, which have resulted in the death of at least 20 Indian soldiers, will have an impact on the bilateral relations. This can impact the business relations between the two countries. In fact, even before the latest border conflict, India was wary of the possibility of the Chinese gaining control of local firms, exploiting the steep fall in share prices.

Many Indian companies had seen their share prices falling due to COVID-19 onslaught on the economy. This evoked interest from multinational investors who smelled the opportunity. India’s concern was mainly on Chinese opportunism. By the second half of April, India began to put in place controls to screen Chinese investment proposals in Indian companies. The most recent trigger was the Chinese central bank’s move to hike stake in India’s premier mortgage financier, HDFC.

What are the rules?

India soon effected some rule changes primarily targeting Chinese investors seeking control of Indian companies. The first such change came a week after the news of the PBOC stake purchase in HDFC appeared in the media. The Department of Promotion of Industry and Internal Trade (DPIIT) acted to prevent hostile takeovers of Indian companies whose market valuations had taken a severe hit due to COVID-19 related uncertainties.

"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," it said. In other words, the government revoked the Foreign Direct Investment (FDI) proposal from countries sharing land borders with India to government approval route from automatic approval route.

This wasn’t the end of it. The government is also reportedly planning to tighten the scrutiny on Chinese investments through Foreign Portfolio Investments route (FPI). According to a report, the government, in consultation with stock market regulator Securities and Exchange Board of India, is planning to set up a body to scrutinise portfolio investments by Chinese companies in Indian companies.

What about the Reserve Bank of India? There are no specific rules from the RBI that restrict investments in India by Chinese companies. According to a  2004 RBI circular, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan shall acquire or transfer immovable property in India, other than lease, not exceeding five years without prior permission of the RBI.

Further, foreign nationals of non-Indian origin resident outside India are not permitted to acquire any immoveable property in India unless such property is acquired by way of inheritance. The RBI rules also say that foreign Nationals of non-Indian origin who have acquired immovable property in India with the specific approval of the RBI cannot transfer such property without prior permission of the central bank.

The idea behind these hurried measures is simple. Once the investments are routed through the government, it can keep a close scrutiny of the profile of investors and the terms of investment. Globally, such restrictions are common for investments from countries that are considered a threat to the destination country.

China—already a major investor in Indian firms

The flip side of restricting Chinese investments in Indian companies is that it could affect many of the existing investments. Indian companies are already struggling to get investments from foreigners. There is no accurate estimate of combined Chinese investments in India. According to some estimates, it could be a cumulative $26 billion. There are a number of companies where Chinese have invested including technology, finance and engineering. These include some big names including Big Basket, Byju’s and Zomato. A blanket ban on Chinese investments and further escalation between the two countries could jeopardise many in the pipeline.

Why China worries us

Chinese investment activities are looked at with some amount of suspicion because of the perception of China’s aggressive approach to dominate economies and markets. Over the years, China has attempted to dominate the trade and investment areas in Asian countries. This has always attracted the attention of policymakers. China has significant investments in Pakistan also. According to a Financial Times report, China’s $62 billion investment under the China-Pakistan economic corridors are looked at with caution by India for its regional political implications. India fears that increased Chinese presence in Pakistan could create security problems for the country eventually.

For this same reason, and especially in the context of China’s latest aggression on the border, India is unlikely to lower guard on Chinese investments in the near future.