New FDI rules may have unintended effects
Ministry’s note, a likely reference to Chinese investors
The Ministry of Commerce press note amending the FDI policy to make investments from countries which ‘share a land border’ with India can only be construed as being aimed at Chinese investors. Such restrictions were already applicable to Pakistan and Bangladesh, while Myanmar, Bhutan, Nepal and Sri Lanka are not major investors in India.
The note makes clear its objective is to curb opportunistic takeovers or acquisitions due to the current COVID-19 pandemic. This is a likely reference to the possibility of Chinese investors purchasing undervalued shares of Indian-listed companies. This is indeed a risk that has also been identified by other countries. On April 12, news of an incremental purchase of shares in HDFC made by the People’s Bank of China made the headlines.
This press note, however, does not restrict its application to such cases.
A plain reading of the amended policy makes every type of investment by Chinese investors subject to government approval. It neither distinguishes between greenfield and brownfield investments nor listed and unlisted companies.
It also does not distinguish between the different types of investors, such as industry players, financial institutions, or venture capital funds. Such a blanket application could create unintended problems.
For instance, it is likely that unlisted or private companies might find themselves under financial stress due to the COVID-19 pandemic.
An acquisition in such companies can only occur between willing buyers and sellers. Making government approval necessary for acquisitions in private companies by Chinese investors will only reduce the number of potential investors available for a prospective seller, and drive down the valuation.
The absence of a white knight may cause bankruptcy and job losses. Greenfield investments are another category where the new rules may pose obstacles.
These are investments where Chinese investors bring fresh capital to establish new factories and generate employment in India. China has been the fastest growing source of FDI since 2014. The positive sentiment generated among industry players in China since then may well be punctured by the need for government approval.
Moreover, the most visible ‘Chinese investors’ in India, most in the Internet space, may not even come under the definitions of the new rules.
Most investors in companies such as Zomato, Swiggy, Bigbasket, Makemytrip, Oyo, Ola and Snapdeal are either venture capital funds registered in off-shore tax havens or listed in stock exchanges in the U.S. or Hong Kong.
It will prove to be extremely difficult to attribute nationality to venture capital funds or fix the ultimate beneficial ownership of listed companies down to founders of a certain nationality.
By abolishing the Foreign Investment Promotion Board in 2017, India took the decision of dismantling the last vestige of an FDI regime that sought to block sensitive foreign investments.
What Delhi should have left behind then was a national security exception — along the lines of the Committee on Foreign Investment in the United States (CFIUS) — to deal with genuine threats to national security or black swan events like the COVID-19 pandemic. Instead, issuing an amendment that reverses what has been a highly-advertised new FDI policy position may have unintended consequences in the minds of foreign investors.
(The writer is Member, CII Core Group on China and Partner, Link Legal India. He advises foreign investors including those from China)