Clarity for FDI

Govt must follow up on its restrictions on investment from China

The government some weeks ago moved to increase scrutiny of investment in India from countries with which it shares a land border. This action was introduced through a note from the Department for Promotion of Industry and Internal Trade, which revised the foreign direct investment policy to curb opportunistic takeovers of Indian companies. However, there are major issues that have emerged of late, thanks to this note, and they need to be clarified as soon as possible. If the government does not do so, then regulators such as the Reserve Bank of India or the Securities and Exchange Board of India will have to. Uncertainty on the matter will put into jeopardy whatever gains India may have made in attracting foreign direct investment over the 2019-20 financial year. 

There is little doubt as to what the government’s intent through its action is. The concern is that Chinese capital — which is often linked very closely with the government in Beijing — will seize the opportunity afforded by the pandemic to buy temporarily undervalued assets in India. This may have negative strategic implications, and thus such investment will have to be scrutinised to ensure that they are not linked to the government in Beijing or the Communist Party. While the motivation behind the move is clear and justified, its implementation must be clear and follow consistent rules. As matters stand right now, the absence of such rules is causing individual decision-making entities to try and interpret them as best they might — which is leading to confusion and inconsistency. 

This confusion runs along two tracks. The first is the definition of what constitutes the level of control or “beneficent ownership” when it comes to declaring a particular entity Chinese. In modern finance, there are few pools of capital that have a clear and singular point of ownership. Thus, the proportion of ownership from a particular country is probably what matters. Yet here there is no clarity provided by the rules, and so individual authorised dealers — banks that deal with the foreign exchange required for such takeovers — are setting their own parameters. As this newspaper has reported, their parameters can range from 1 per cent of Chinese ownership to 25 per cent. Such confusion obviously disincentivises investment, and has the additional effect of weakening the intent of the new requirement, as investors can try and shop around till they find a suitable dealer. This will be the case until the government clearly defines the term “beneficial owner” through a proper change to the appropriate rules governing the implementation of the Foreign Exchange Management Act. 

Nor is this the only confusion introduced by the new requirement. It should be made clear to market participants, for example, what entities are covered by the “land border” requirement. If the Hong Kong Special Autonomous Region is part of the freshly constrained areas, that is one thing. But it is absurd, for example, if Taiwan is included in these rules. There is also confusion about what is meant by “fresh” investment, since some investment was earlier committed but not operationalised. Clarity from the government has been expected for some weeks but is yet to arrive. It should act on this speedily if it does not want foreign investment to suffer unduly.