A landmark judgment came in over the weekend when the government amended the Foreign Direct Investment (FDI) policy to discourage opportunistic investment in Indian companies by the neighbouring countries, such as China.
This comes after China's central bank, PBOC, recently raised stake in Housing Development Finance Corporation (HDFC) to a little over 1 percent according to March quarter shareholding data.
“Due to fear of hostile acquisitions by Chinese interest in the US and Europe, the commerce ministry had to take cognizance to protect India’s economic interest. Without a doubt, this is a landmark decision,” Dhiraj Lalpuria, Vice-President, Choice Consultancy Services Private Limited, a management advisory firm said.
“But the govt must ensure strict implementation and vigilance about the investments made indirectly by foreign beneficial owners of the intended countries under any other investment category,” he said.
There are two more Indian companies in which foreign institutional investors from China hold a substantial stake - Visa Steel, ZEE Entertainment.
Baosteel Resources Co. Ltd., China, invested about 5 percent in Visa Steel as per December quarter shareholding data, according to AceEquity. OFI Global China Fund, LLC holding in ZEE Entertainment Enterprises is about 10.14 percent as of December quarter, data showed.
It is a welcome step by the government to safeguard companies, especially at a time when the stock prices of many bluechip companies are trading at multi-year lows. Nations such as the US, Japan, and Australia have already placed restrictions on Chinese companies buying assets.
"In essence, it is trying to counter the likely threat of Chinese domination in a post-COVID-19 world. While some may call it a xenophobic reaction but this is the most natural and appropriate step that the government could have taken given the current circumstances," Rajat Bose of rajatkbose.com told Moneycontrol.
Experts feel that FII route should also be plugged to maximise the impact. A foreign investor can acquire the stake in 2 ways –
(1) in unlisted/ listed companies under Foreign Direct Investment (FDI) Route
(2) in listed companies, by way of secondary market transactions (stock exchange route).
This is called the Portfolio Investment Route. Here FII/FPI can invest in any listed company but there is a ceiling of 10 percent per FII/FPI. And put together such FII/ FPI can investment up to sectoral caps, said a note from MMJC and Associates LLP, a corporate compliance firm.
“Keeping in mind that the needle of suspicion worldwide is now towards China, which has been hostile and in hot pursuit to acquire companies in Europe and US,” Makarand Joshi, partner, MMJC and Associates LLP said.
“While the Indian government has amended Foreign Direct Investment (FDI) route it has not plugged in Foreign Portfolio Investor (FPI) or Foreign Institutional Investor (FII) route, which also needs to plugged to achieve the coveted objective of the government of protecting Indian economy’s interest,” he added.
Joshi further added that the notification falls short of protecting the vulnerable listed entities in the Indian capital market space because it only talks about the FDI route and not the FPI route.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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