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Govt revises FDI policy over fears of Chinese takeover of Indian firms amid Covid-19 crisis

Press note by Department for Promotion of Industry and Internal Trade says move is aimed at curbing opportunistic takeovers/acquisitions of Indian companies due to Covid-19 pandemic.

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New Delhi: In a major move aimed at protecting Indian interests from China, the government has notified new rules that will require all Chinese firms to seek prior government approval before making investments into India.

The Indian government move comes even as many other countries like Italy, Spain have also moved to protect their companies weakened by Covid-19 from hostile takeovers and acquisitions.

China has been rapidly expanding its economic footprint in South Asia through its one belt one road initiative making huge investments in countries including Pakistan and Sri Lanka.

The Covid-19 pandemic has had a widespread economic impact with many firms struggling to stay afloat with the near halt in economic activity. At this time, many firms struggling financially may be vulnerable to takeovers or acquisitions.

Also read: India’s young people can be the corona-warriors who’ll put the economy back on track

‘Move is aimed at curbing opportunistic takeovers/acquisitions’

The move is aimed at curbing opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic, said a press note issued by the Department for Promotion of Industry and Internal Trade.

According to the revised FDI policy, “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.”

India shares land borders with China, Pakistan, Bangladesh, Myanmar, Nepal, Bhutan and Afghanistan.

This will impact not only direct investment from China but also investments by Chinese companies routed through other countries for their beneficial tax regime like Singapore and Mauritius.

Analysts said the curbs on Chinese investments will impact sectors like consumer electronics like mobiles and its various components.

So far, prior government approval was needed only for firms from Bangladesh and Pakistan to invest in India and investments from other countries were allowed under the automatic route subject to the sectoral caps and rules. The revised guidelines reaffirm that investments from Pakistan will not be allowed in strategic sectors like defence, space and atomic energy.

Prior government approval will also be required in case there is a transfer of ownership in existing Indian firms where the indirect owner belongs to any of the restricted countries.

“The above decision will take effect from the date of FEMA notification,” the government said.

Also read: RBI gives another big bonanza, this time to NBFCs, stressed borrowers, rural sector, MSMEs

‘Move is based on fears that the Chinese will dominate’

Recently, HDFC had disclosed to the stock exchanges that the Chinese central bank – People’s bank of China’s shareholding in the housing finance company had crossed 1 per cent.

Biswajit Dhar, Professor, Centre for Economic Studies and Planning, School of Social Sciences at Jawaharlal Nehru University said that the Indian government’s move is based on fears that the Chinese will dominate the post Covid-19 world.

“The Chinese are already back on their feet and have got a significant headstart over other countries. Manufacturing activities have kickstarted. Chinese firms can target the low hanging fruits. Many Indian companies will be up for grabs including the mid-sized ones,” he said.

“India’s move is a pre-emptive one. China is likely to dominate trade in the coming years and India cannot do anything about it. But it can at least act to restrict Chinese investments,” he added.

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