Amendments To FDI Policy


  • On 18th April, 2020, the government amended the extant Foreign Direct Investment (FDI) policy, mandating neighbouring countries to require government approval, effectively closing the “automatic route” used by firms and individuals to set up business in the country.

Need

  • India’s move was attributed to the rising possibility of “opportunistic takeovers” of its companies, as the coronavirus pandemic wreaks havoc on the economy.
  • Several Indian start-ups have existing investment from Chinese investors. For instance, Flipkart has an investment from Tencent (about 5 percent) and Alibaba owns a significant stake in Paytm.
  • The decision came days after China’s central bank, the People’s Bank of China (PBoC) had raised its shareholding in HDFC to over 1 percent.
  • It is to be noted that China’s FDI has grown five-fold since 2014 and, as of December 2019, its cumulative investment in India exceeded $8 billion — “far more” than investments by other countries that share borders with India.

Present FDI Norms for Neighbouring Countries

  • FDI in India is allowed under two modes - automatic (companies don't need government approval) or via the government (companies need a go-ahead from the centre).
  • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
  • However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
  • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Changes Made

  • The existing FDI policy as applicable to investments from India's neighbourhood, was confined to Bangladesh and Pakistan, while the new policy brings China, Nepal, Bhutan and Myanmar within its ambit.
  • Firms in neighbouring countries wanting to invest in Indian companies would first need its approval.
  • An entity of a country that shares a land border with India can now invest in firms here “only under the Government route”.
  • This also applies to “beneficial” owners — even if the investing company is not located in a neighbouring country, it would still be subject to these conditions if its owner is a citizen or resident of such a country.
  • In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership, such subsequent change in beneficial ownership will also require Government approval.

China’s response

  • China said that the additional barriers set by Indian side for investors from specific countries violate WTO’s (World Trade Organization) principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment.
  • China has called for India to revise these “discriminatory practices” and treat investments from different countries equally.
  • Further, China said that the new norms do not conform to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.

India’s Argument

  • India maintains the policy is not aimed at any one country and that the move is aimed at curbing “opportunistic” takeovers of Indian firms, many of which are under strain.
  • The amendments are not prohibiting investments. There are many sectors in India that are already subject to this approval route.

International Measures

  • On March 25, 2020, the European Commission issued guidelines to ensure “a strong EU-wide approach” to foreign investment screening at such a time. The aim was to preserve EU companies and critical assets, notably in areas like health, medical research, biotechnology and infrastructures essential for security and public order, without undermining the EU’s general openness to foreign investment.
  • On March 30, 2020, Australia temporarily tightened rules on foreign takeovers over concerns that strategic assets could be sold off cheaply. This followed warnings that distressed Australian companies in the aviation, freight and health sectors could become vulnerable to buyouts by state-owned enterprises, especially China. All foreign takeover and investment proposals will now be scrutinised by Australia’s foreign investment review board.
  • Spain, Italy and the US too has implemented investment-related restrictions.

Concerns and Unintended Effects

  • The amended policy makes every type of investment by Chinese investors subject to government approval. Such a blanket application could create unintended problems.
  • It does not distinguish between Greenfield and Brownfield investments. It may pose obstacles to Greenfield investments where Chinese investors bring fresh capital to establish new factories and generate employment in India.
  • Further, the amendments do not distinguish between the different types of investors, such as industry players, financial institutions, or venture capital funds.
  • The restrictions on Venture capital funds may impact the prospects of many start-ups in the Indian market.
  • According to the experts, there are different sets of procedures for the same set of investments based on which country the company is investing from. This is where the potential issue of discrimination arises. While India can discriminate in favour of domestic investment, discrimination against certain countries for non-security reasons may not be seen favourably on the global stage.