FDI policy change: While taming the dragon, India might be harming its baby elephants

Oyo

The government has amended its Foreign Direct Investment (FDI) policy to require explicit approval if neighbouring countries want to invest in India, seen primarily as a way to curb Chinese investments.

“An entity of a country, which shares a 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,” said a statement from the Department for Promotion of Industry and Internal Trade (DPIIT).

This is a step the government has taken since the start of this week after Housing Development Finance Corp. Ltd (HDFC) said that  the Chinese central bank, the People’s Bank of China (PBOC) had raised its stake in the home lender from 0.8% to 1.01% in the March quarter through open market purchases.

"This primarily intends to stem any attempts by Chinese firms to take control of Indian firms which have been affected and weakened by COVID-19-related lockdowns. SEBI has also begun reviewing FPI investments from Chinese funds over possible takeover concerns,” said Atul Pandey, partner at law firm Khaitan & Co.

More importantly, the notification is not restricted to prior approval for direct investments by Chinese firms and also restricts any transfer of investments / future FDI resulting in beneficial ownership falling with Chinese firms, he added.

While this move was triggered by PBOC’s investment in HDFC, it will also impact Indian startups, for whom China has been a stable source of capital. Alibaba and Tencent, China’s largest listed firms, are shareholders in over a dozen Indian startups, collectively worth tens of billions of dollars- in companies such as One97 Technologies (Paytm), Oyo, Dream11, Snapdeal and BigBasket.

Besides strategic investors such as Alibaba, Tencent and ByteDance, Chinese venture capital firms have also been ramping up their presence in India. Some of China’s largest VCs such as Qiming, CDH and Morningside have all made early stage bets in India.

However, this notification will have the force of law when necessary amendments are introduced to the relevant FEMA regulations. Other countries such as Australia and in the European Union are also considering similar provisions.