A Glimpse of India’s Desperation for Change in its FDI Policy

After watching the COVID-19 strain, economies worldwide have strategized their economy saviour plans. India, just like other countries saw its stock market crashing and price of shares falling. India was at a crossroads on whether or not it should consolidate its legislations regarding the investment policy concerning foreign investors and especially with reference to opportunistic takeovers. The Government of India has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017.[1]

It is an archaic trend which may be tenuously connected with the 17th Century when merchants of East India Company appealed to the Mughal Emperor to establish a factory at city of Surat in India. It was seen that they brought new inventions and technologies with them which led to a new era of development. It was again scrutinised when after the World War 2, Japanese firms entered India to trade with various investments. Policy makers of independent India listed a need to develop policy for foreign investments. A landmark development was the introduction of Industrial Policy of 1980 which allowed the MNC’s to venture through various technical collaborations in India. Looking at the sacrosanct of investments and the then circumstances, Dr. Manmohan Singh introduced the Foreign Exchange Management Act, 1991 to augment investments in India. India has always been a centre for investments.

The current Indian government acting expeditiously, put a blanket ban on investments which come from the countries sharing border with India. The legislations already existed curbing investments from Pakistan and Bangladesh via Automatic route which extended to all the countries that share a boundary with India. This move will affect entities having investors from these states with ‘beneficial ownership’ as this amendment ensures restrictions on routing investments via countries like Hong Kong, Singapore etc.

The revised position of FDI Policy states that:

3.1.1(a) 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. 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.[2]

3.1.1(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.[3]

The enactment empanelled changes in Civil Aviation sector, Insurance sector, Mining sector, Manufacturing sector, Trading sector, Audit Firms, Pharmaceuticals and various other sectors.[4] The wary behaviour of Indian Government’s pre-empting exploitation of Indian companies at hands of various foreign investors, consolidating the realm of foreign investment, shows scrutiny by the government of acquisitions and takeovers during the period of global health and economic crisis.

It turns out that the government may have rushed in changing its policy pertaining to foreign investments. At the time of global economic crisis when banks are not so keen towards lending loans to companies, companies are struggling to come out alive of this situation, putting a blanket ban which leaves no kind of exemptions for Chinese investors which may turn out to an unwise move. The FDI inflows for financial year (FY) 2009-10 was $37,745 million and over the ensuing decade, the FDI inflows have recorded a steady growth every year. For FY 2018-19, the inflows were $64,375 million, i.e. 70.55% higher than the annual inflows in 2009-10.[5] In the first quarter of 2019, equity inflows rose 28% in the first quarter of 2019-20 to $16.3 billion from $12.7 billion in the year-ago period, official data showed on Wednesday.[6]

China has investments in India which is negligible compared to top five foreign investors for India. The move may see severe consequences as Indian trade deficit with China cannot be overlooked. Talking of the past, Foreign Investments in every sense have been a last moment game changer. From providing employment to boosting economy, its contribution in various sectors especially Aviation, Real Estate, Automobile and Pharmaceuticals has been tremendous.

Looking into the FDI increase from China in last three years, it has been but obvious that this move will result in fewer potential buyers further depressing the current value of firms. As of now, the need of the hour is to refuel the demand in Indian markets and boost the companies for more production to save our economy from falling into the worst financial crisis ever. Concerning Nifty top 100 firms, the percentage of foreign investment is more than 10% and it is nowhere near a threat for them. Talking of the Unicorns, at least 18 of the top 30 Unicorns have by some way or the other a component of Chinese investment.

The government’s wedge move has brought Chinese firms and investors in a frenzy state. China’s policies towards Foreign Investment have experienced roughly three stages: gradual and limited opening, active promoting through preferential treatment, and promoting FDI in accordance with domestic industrial objectives and these changes in policy priorities inevitably affected the pattern of FDI inflows in China[7], says Reserve Bank of India. Chinese firms seem unhappy with this move and their investment policies will have to circumvent the ramification of change in FDI policy of India.

Earlier Pakistan and Bangladesh already were mandated to the government route. Further extending this to all the neighbouring countries, mainly targets China. The issue with change in Policy is not only related to aftereffects but legality. “The additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination and go against the general trend of liberalisation and facilitation of trade and investment,” Chinese embassy Spokesperson Ji Rong said in a statement.[8] According to China, India should revise its discriminatory policies. Though true that countries, at this time of economic crisis need to come together to fight out of it but surely it doesn’t mean that countries need not protect their companies from opportunistic takeovers.

As of China’s claims, firstly, WTO doesn’t have jurisdiction over regulation of Foreign Investments in a country, instead was formed to govern trade practices across the world and to some extent, Intellectual Property. WTO in the dispute of United States and Canada[9] has asserted that the mandate of WTO is to ascertain the realm of trade practices just as its predecessor GATT.[10] Secondly, even if it were involved, the WTO always grants exceptions for the emergency situations in case of war or any other, and spread of COVID-19 is definitely a situation which led the world towards global financial emergency. The author believes that if a country is concerned about its national security, it does not mean that the country is not committed to fair trade practices.

At one instance, when value of shares of non-banking mortgage provider HDFC fell to its two third value, People’s Bank of China increased its stakes from 0.8% to 1%. India sought to consolidate its laws to protect its companies and acted in national interest. Lastly, if china were to claim the irregularities in the new investment policy, it would have to be through the procedure of Bilateral Investment Treaty (BIT).

In common parlance, a BIT is an agreement of understanding between two countries, which sets up various rules and procedures for the countries to follow regarding investments made under two countries to protect the companies from unfair trade practices and to ensure more consolidated trade relations between the companies. China has a BIT with US[11] but not with India. The author believes even if a BIT existed between India and China, it would definitely contain exceptions in cases of emergencies or when it comes to national security. Countries surely will not be compromising when it comes to national security.

India is not alone in the fight. Various countries and organization fear China’s strategy to establish control over companies worldwide and so does European Commission. The guidelines presented by European Commission apprises fear of opportunistic takeovers when shares of wide range of companies are crashing. Some strategists would definitely be looking at the crashing share prices of prominent MNC’s and willing to buy stakes at a throwaway price. Saving the country and companies from these opportunistic takers is surely not immoral trade practice or an act to cause hindrance in free international trade. China, after emerging as a responsible stakeholder has seen damages to its trade relations with countries, especially US and Japan. India is very unlikely to follow bullying by China as it gained a good bargain and a strong legal footing.

Conclusively, the expeditious move of India, showing glimpse of desperation for changing its Foreign Investment Policy may damage its companies and inflow of money to some extent. Struggling companies reeling under a severe liquidity crunch need financial support to come out of this crisis and further depression in investment and share prices may not be a good sign. The move though bona-fide, was made in rush as a bit more investment could have helped the companies, believes the author but when it comes to national security nothing could be compromised. Also, Beijing’s claims for irregularities by policies of Delhi for foreign investment are not on strong legal base.


[1]Ministry of Commerce & Industry, 18 APR 2020 3:58PM,  PIB Delhi https://pib.gov.in/PressReleasePage.aspx?PRID=1615711

[2] Department of Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, Press Note No. 3(2020 Series),  https://invest-india-revamp-static-files.s3.ap-south-1.amazonaws.com/2020-04/FDI%20Policy%202019%20revised_19%20April%202020.pdf

[3] Ibid at § 3.1.1

[4] https://www.investindia.gov.in/foreign-direct-investment

[5] Bharath Kancharla, Analysis: The story of FDI inflows of the last 10 years, (JULY 31, 2019), https://factly.in/analysis-the-story-of-fdi-inflows-of-the-last-10-years-which-sectors-are-receiving-a-lions-share/

[6] Kirtika Suneja, FDI inflows up 28% in Q1, Sep. 05, 2019 (9:54 am), https://economictimes.indiatimes.com/news/economy/indicators/fdi-inflows-up-28-percent-in-q1-to-16-3-bn/articleshow/70986011.cms?from=mdr

[7] https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FDIST_110412.pdf Reserve Bank of India

[8] PTI, India’s new FDI norms ‘discriminatory’ violate WTO’s free trade principle, The Week, Apr 20, 2020 (15:57 IST), https://www.theweek.in/news/biz-tech/2020/04/20/indias-new-fdi-norms-discriminatory-violate-wtos-free-trade-principle-china.html

[9] Disputes Settlement Report, World Trade Organization, GATT reports list https://www.wto.org/english/tratop_e/dispu_e/gt47ds_e.htm

[10] Agreement on trade related Investment measures, World trade organization https://www.wto.org/english/tratop_e/invest_e/invest_info_e.htm

[11] United States China Business Council, Bilateral Investment Treaties,  https://www.uschina.org/reports/bilateral-investment-treaties-what-they-are-and-why-they-matter


Aryan Anand from Chanakya National Law University, Patna

Aryan is sports enthusiast who dreams to serve the Indian Air Force.

editor: vatsala sood

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