As the COVID-19 outbreak has severely hit the liquidity place of many home companies, making them simple prey for cash-rich Chinese buyers, the federal government has tightened its overseas direct funding (FDI) coverage to curb “opportunistic takeovers/acquisitions” by entities in bordering nations.
Any FDI proposal by buyers from the bordering nations will now require authorities clearance, even when overseas investments for that sector are positioned below the automated route. Prior to the transfer, all FDI proposals from solely Pakistan and Bangladesh had been required to be cleared by the federal government. FDI from Pakistan can also be prohibited in sure delicate sectors, together with defence, house and atomic vitality. Over 90% of the nation’s FDI comes via the automated route.
The division for the promotion of trade and inside commerce (DPIIT) on Saturday mentioned: “A non-resident entity can invest in India, subject to the FDI policy, except in those sectors/activities which are prohibited. However, an entity of a country, which shares 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.” Analysts say the transfer is in sync with the steps taken by the EU and Australia after the novel coronavirus outbreak.
Atul Pandey, associate at Khaitan & Co, mentioned Sebi has additionally begun reviewing FPI investments from Chinese funds over potential takeover considerations. Importantly, the notification additionally covers any switch of investments/future FDI leading to useful possession falling with Chinese companies. However, the mode of computation of ‘beneficial ownership’ remains to be unclear, he added.
The FDI inflows from China have remained meagre, regardless of some enchancment in recent times. China has previously pledged to step up investments in India, following New Delhi’s calls that Beijing trim its large commerce surplus with this nation. But massive investments barely flowed in. In truth, between April 2000 and December 2019, FDI from China stood at simply $2.34 billion, or solely 0.51% of the cumulative inflows throughout this era, in response to the DPIIT information. But India’s merchandise commerce deficit with China stood at an enormous $53.6 billion in FY19, or practically a 3rd of its complete deficit. In the April-January interval of the final fiscal, China made up for near a 3rd of India’s general items commerce deficit.
However, provided that many Indian companies, which had been already below stress even earlier than the pandemic, can probably flip bancrupt now, the federal government worries that Chinese buyers may ramp up acquisition efforts, taking undue benefit of a drastic drop in these companies’ valuations.
Interestingly, Congress chief Rahul Gandhi just lately known as on the federal government to cease overseas pursuits from taking up weak Indian corporations, hit by the pandemic.
Companies within the US and the EU, which account for a sizeable chunk of the FDI inflows into India, are already reeling below the influence of the COVID-19 disaster. So possibilities of opportunistic acquisition bids by them are restricted.
India’s FDI inflows (fairness) rose 10% year-on-year within the first three quarters of the final fiscal to $33.5 billion.
However, China has entered the Indian market via enterprise investments in start-ups and penetrated the web ecosystem with its standard smartphones and their functions. According to a report by researchers Amit Bhandari and Aashna Agarwal, Chinese tech buyers have put an estimated $four billion into Indian start-ups. Over the 5 years ending March 2020, 18 of India’s 30 unicorns at the moment are Chinese-funded. “TikTok, the video app, has 200 million subscribers and has overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the US penetration of Facebook, Amazon and Google in India. Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72% share, leaving Samsung and Apple behind.”
Vikram Doshi, associate (Tax & Regulatory) at PwC India, mentioned the pandemic will primarily influence companies which are extremely leveraged. “This press note is an attempt to place a check and give the government an opportunity to review such takeovers and investments coming into India from specific jurisdictions.”