How is India Treating FDI Proposals Involving Chinese Entities?

Posted by Written by James Fox Reading Time: 6 minutes

Under its updated FDI Policy, India has approved some investment proposals from China. Yet, New Delhi remains abundantly cautious, reportedly approving only 80 out of 382 investment proposals from Chinese entities since the restrictions were introduced in April 2020. Meanwhile, Indian regulators are closely monitoring companies, corporate persons, and service professionals who could be circumventing the FDI rules. The central government has also directed law enforcement agencies and regulators to share their information with each other when investigating Chinese companies doing business in India for reasons of security besides concerns over tax malpractice and customs duty evasion.

India’s diplomatic and, consequently, business relations with China have deteriorated in recent years, triggered by tensions and eventual skirmishes along the Himalayan border and a series of allegations about Chinese companies harvesting personal data from Indian operations.

New Delhi acted in 2020, prior to border skirmishes, making security clearance mandatory for foreign direct investment (FDI) coming from countries that share a land border with India. This, naturally, impacted Chinese investors and businesses.

In July 2022, more information came to light about the current state of affairs concerning Chinese investment in India. According to data obtained by the Economic Times in a Right to Information (RTI) request, India has approved 80 FDI proposals involving Chinese entities as of June 29, 2022.

It is not clear how many proposals had been rejected by the government, although it was noted that the government had received 382 proposals from Chinese affiliated entities since India imposed specific restrictions on FDI.

What’s behind New Delhi’s investment restrictions for neighboring countries?

In May 2020, troops from India and China engaged in skirmishes at locations along the Sino-Indian border. The conflict often centered around the Pangong Tso or Pangong Lake, which sits on land claimed by both countries. New Delhi and Beijing both blamed each other for the ongoing melees, which claimed the lives of dozens of soldiers.

Amid the simmering geopolitical tensions, in April 2020, Prime Minister Narendra Modi’s government put restrictions on foreign investments from nations sharing a land border with India. Aimed primarily at China, the new rule stated that foreign investors from these nations would have to seek regulatory approval before investing in India or increasing their stakes in Indian companies.

Government communications at the time highlighted the need to prevent “opportunistic takeovers” of Indian companies by Chinese investors and entities, particularly in the economically vulnerable period due to the pandemic.

This unfriendly investment environment was worsened by allegations that Chinese companies had been gathering the personal data of a large number of Indians, reportedly for the benefit of senior members of the Chinese Communist Party.

The reports raised more security concerns as the companies allegedly engaging in the malpractice had been obliged to share data with the Chinese government, if required. According to the Economic Times, the companies that came under scrutiny were investigated by the Indian government for tax evasion and other financial noncompliance.

What are the restrictions on Chinese FDI into India?

As discussed, the original rules prevent Chinese individuals or entities from investing in India without receiving security clearance first. The Department of Promotion for Industry and Internal Trade (DPIIT) – India’s official trade and investment regulator –issued a notification concerning the changes on April 17, 2020.

Prior to the amendment, approval from the Ministry of Home Affairs (MHA) was required only for investments into critical sectors, such as defense, telecommunications, and private security, in addition to any investments originating in Pakistan and Bangladesh.

It is worth noting that the amendment has also meant that investors from Afghanistan, Bhutan, Myanmar, and Nepal, besides Pakistan and Bangladesh, need to seek the Indian government’s approval before taking forward their FDI investment. Although, it is widely accepted that the policy was designed with exposure to the Chinese in mind.

Further crackdowns on Chinese investment in India

The FDI restriction is not the only measure enacted by New Delhi in creating a new, stricter environment for Chinese investment in India. In April 2022, the Union government passed the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, in what was seen as a further attempt to crackdown on prohibited Chinese investment in India.

The amendment “sought to enhance” the accountability of chartered accountants and company secretaries. Two months later, as reported in The Hindu, the Union government recommended that action be taken against 400 chartered accountants and company secretaries. It is alleged that they assisted in incorporating Chinese shell companies in India without complying with the established regulations.

As per reporting in The Hindu Business Line, “the CA Institute has issued disciplinary notices to more than 200 chartered accountants for their alleged role in aiding several Chinese firms violate the Companies Act 2013, through their India-incorporated subsidiaries and shell companies in recent years.”

The Ministry of Corporate Affairs (MCA) has also been probing several Indian companies with links to Chinese individuals and entities. According to the Economic Times, the MCA registered 700 cases against companies in which Chinese nationals were on the board and may have been using their position for illicit purposes, including money laundering or illegal political funding. Some of these entities are suspected of being shell companies used to bring money into India and possibly circumvent FDI restrictions.

This followed reports in February that the MCA had issued an order to the Registrar of Companies in Delhi and Haryana, initiating action against at least 100 chartered accountants and company secretaries. According to reports, this was associated with 174 Chinese companies and concerned alleged professional misconduct and unlawful activities.

In June 2022, the government clamped down further, with the MHA issuing a notification requiring citizens of border-sharing nations to obtain security clearance before being permitted to hold a company directorship in India. Sources told the Tribune India that the move was essentially aimed at preventing Chinese companies from circumventing Indian laws to do business in the country. The notification was reportedly only issued after the government had learnt that Chinese and Hong Kong investors had been able to bypass the restriction on foreign investments from neighboring nations

Meanwhile, in August, India’s Directorate of Revenue Intelligence (DRI) stated that it had detected a customs duty evasion to the tune of INR 22.17 billion when investigating smartphone company Vivo Mobile India Private Limited. Four Chinese smartphone brands feature among the top five in the Indian market and reported healthy growth in Q2; Xiaomi reported 20 percent growth in Q2 2022, Realme reported 16 percent growth, followed by Vivo (15 percent) and Oppo (10 percent). While these brands continue to grow their market presence in India, the central government appears to be considering some protective measures to block access to cheaper segments to favor local smartphone makers.

On August 18, Indian media reported that the government had directed its law enforcement agencies and regulators to share information with each other regarding their investigations of Chinese companies. The Print reports: “The ministries of home, finance and external affairs are going to work together, for instance, to ensure that if there is a case of tax evasion by a Chinese company where foreign channels are involved, then the information on related transactions could also be shared with the Enforcement Directorate (ED).”

How have the restrictions and investigations by regulators impacted Chinese investments in India?

According to ongoing reporting by the Economic Times, which has been closely monitoring developments, New Delhi strictly implemented its new security-oriented investment restrictions at first, not giving any approval for FDI to Chinese companies until mid-2021. As noted, only 80 of 382 applications from Chinese entities have been approved since the rules were brought in.

India is adopting a cautious approach towards FDI proposals involving China-based entities due to perceived security, financial, and data risks. 

According to the Ministry of Commerce and Industry, FDI inflow from China into India was equivalent to US$1.81 billion between April 2014 to March 2019. This equates to around US$360 million per annum over the five-year period.

However, in the financial year 2020-21, reports stated that FDI into India from China and Hong Kong fell to just US$200 million – its lowest in several years and considerably below the five-year average. FDI fell further in the first half of 2021-2022, with the figure standing at just US$36 million over the six-month period.

Chinese dealmaking in India

The Economic Times reported that the deals being approved by Indian regulators are generally ones which concern the acquisition of minority stakes in Indian companies by Chinese entities; these proposals typically do not impact who controls the business.

Further, applications concerning manufacturing and other capital-intensive sectors were reportedly getting preference over other industries, such as e-commerce and financial services.

It was also highlighted that entities involved in physical infrastructure carried lower risks than ones that involved digital operations, as per an unnamed official speaking to the paper. “With digital platforms, there are always concerns over data privacy, while physical assets are easier to defend even in adverse scenarios,” the official stated.

Moreover, an industry expert told the Economic Times that New Delhi was also being cautious in considering proposals when it came to applications involving politically exposed persons in China or Hong Kong.

Reports had emerged earlier this year that India was at one point considering reducing the restrictions on Chinese investment. People familiar with the matter suggested that US$6 billion of potential FDI was held up behind red tape at the time.

Bilateral trade booming, favoring China

On the other hand, despite the restrictions on FDI, Sino-Indian trade has continued to grow. Trade between the two nations is on track to surpass US$100 billion for the second consecutive year.

Trade data from July highlighted that India-China bilateral trade was worth US$67 billion in the first half of 2022. Last year, the bilateral trade had reached a record US$125 billion. Chinese exports to India increased in 2022, while India’s exports to China fell, exacerbating the existing trade deficit.  

This article was originally published July 18, 2022. It was last updated August 18, 2022.

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