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Government amends the extant FDI policy

Government amends the extant FDI policy

What to study?

For Prelims: Key changes introduced and implications.

For Mains: Significance and the need for these measures.

Context: The Government has amended certain sections of the FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.

While India shares a land border with Pakistan, Bangladesh, Myanmar, Nepal, Bhutan, China and Afghanistan, the move appears directed mostly at China.

The changes introduced:

  1. All FDI proposals from countries sharing border with India will be under the government approval route.
  2. The so-called automatic route, under which the central bank simply had to be informed after money was invested, has been blocked in such cases.
  3. Companies whose beneficial ownership also lies in such countries will have to undergo government scrutiny for any change in foreign holding.

Need for these measures:

  • Many Indian businesses have come to a halt due to the lockdown imposed to contain the COVID-19 pandemic. Subsequently their valuations have plummeted.
  • Many such domestic firms may be vulnerable to opportunistic takeovers or acquisitions from foreign players.
  • Recently, People’s Bank of China made a portfolio investment through the stock market into the housing finance company HDFC and now holds a 1.01% stake in the company.

How was the FDI policy for neighbours so far?

  1. A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
  2. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
  3. 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.

Concerns and unintended impacts:

  1. The amended policy makes every type of investment by Chinese investors subject to government approval. Such a blanket application could create unintended problems.
  2. 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.
  3. The new policy does 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.

Chinese investment In India:

  • China’s footprint in the Indian business space has been expanding rapidly, especially since 2014.
  • The Chinese investment in India in 2014 stood at $1.6 billion. This involved mostly investment from Chinese state-owned players in the infrastructure space in India.
  • By 2017, the total investment had increased five-fold to at least $8 billion accompanied by a marked shift from a state-driven to market-driven approach.
  • Total current and planned Chinese investment in India has crossed $26 billion in March 2020.

Sources: pib.