New Delhi: – The Indian government changed the rules for Foreign Direct Investment (FDI) to prevent China from acquiring Indian companies and taking undue advantage of the situation, created because of the Coronavirus pandemic. Now the union government has started preparations to make the rules governing the Foreign Portfolio Investment (FPI) stricter, to stop the Chinese onslaught even through this route. 16 and 111 financial institutions from China and Hong Kong, respectively, are registered in India as FPI, and the government is closely monitoring their investments in the country. The government is taking these steps to prevent backdoor entry into companies intending to take them over.
There are two routes of foreign investment coming to any country. One is FDI, and the other is FPI. Under FDI, international companies invest directly in a project or company and acquire a certain stake in them. This is a long-term investment. The percentage of stake that can be acquired by a foreign company is governed by the country’s policy. In India, 100% ownership of companies by a foreign entity is allowed in specific sectors. In particular sectors, there is a cap of 49% for the international company’s stake. This investment cannot be withdrawn all of a sudden.
Although FPI is the other route of foreign investment, no FPI can acquire more than 10% stake in an Indian company. This investment is in the form of shares or bonds. FPI is allowed to withdraw all their investment at any time, depending on the profit/loss status of the Indian company. Therefore, these investments have a major effect on the stock market indices.
In the month of April, the government blocked the automatic route for FDI, making it mandatory to get prior approval from the government. These changes were made keeping China in view. In short, the government took this decision to foil the Chinese plot to acquire Indian companies.
The government suspects that after blocking the FDI channel, the Chinese companies can misuse the FPI route for the purpose of acquisition of Indian companies. The government is thinking of making the rules governing the FPI stricter in order to prevent the foreign investors who failed to acquire Indian companies through the FDI route, from using the FPI route to for the purpose. The government intention is to stop the companies with 10% Chinese holding or Chinese ownership from acquiring Indian companies.
This means that the Department for Promotion of Industry and Internal Trade (DPIIT) is preparing to change the definition of Beneficial Ownership in the companies act. As per the current description of Beneficial Ownership, the companies and financial institutions making FDI were offered various concessions. The stock market watchdog, SEBI, also is collecting more information regarding the Chinese FPIs. It is reported that this information will be useful for controlling the opportunistic investments by Chinese FPIs.
Many companies are facing an economic crisis due to the Coronavirus pandemic. The shares prices of many companies are at their lowest levels. Analysts from many countries had expressed fears that China will take advantage of the situation and acquire local companies. Therefore, Japan, Australia, Germany, Spain, Italy and many other countries made the rules governing the FDI stricter. The Indian government decided to change the practices for FD after the People’s Bank of China bought 17.5 million shares of HDFC. The HDFC shares had crashed by 35% before the Chinese Bank purchased them. This exposes Chinese opportunism.