Will India’s FDI Policy Change Impact Chinese Investments Post-COVID-19?

Posted by Written by Nishtha Yadav Reading Time: 3 minutes
  • India is making government approval mandatory for all foreign investment from neighboring countries.
  • The move reportedly comes after it was felt that China was attempting to acquire assets in key sectors across the world as economies struggle during the COVID-19 pandemic.
  • India, meanwhile, is emerging as a strong alternative to China for foreign companies invested in manufacturing and sourcing.

India’s official trade and investment regulator, the Department of Promotion for Industry and Internal Trade (DPIIT), notified changes to India’s foreign direct investment (FDI) policy, which now makes government clearance mandatory – for all FDI inflows from countries that share land borders with India.

The FDI policy was tightened to prevent any opportunistic takeovers or acquisition of Indian companies due to the COVID-19 pandemic. This decision comes after it was reported that China appears to be trying to acquire distressed assets in strategic sectors globally during the pandemic. Australia, the European Union, Germany, France, Spain, and Italy have already taken measures to counter this move by tightening their foreign investment rules.

Further, in the notification issued by DPIIT – transfer of ownership of any existing entity or future FDI in an entity in India, directly or indirectly, resulting in beneficial ownership falling within this restriction will require mandatory government approval.

Basically, investors from India’s neighboring countries will need to seek Indian government’s approval before taking forward their investment – for the foreseeable future.

Impact of the revised FDI policy

Till December 2019, China’s cumulative investment in India exceeded US$8 billion. With a strategic partnership gradually coming into place, there is some concern that the new restriction could hurt bilateral trade relations as well as hamper foreign investment. However, some experts believe that industry will not be affected by this change in the long run.

Identifying the revised policy as a temporary move to protect India’s economy during the pandemic stress, legal experts say that non-problematic Chinese investment is expected to be cleared by the government easily. Therefore, it is important the government approval process is completed in the stipulated time as several firms in India will be dependent on foreign investment for their survival.

It is important to note that foreign investment from China is not banned, but rather a screening process has been initiated to examine the implications of the investment, as countries across the world are trying to manage the burden borne out of the pandemic while ensuring their economic stability and security.

According to a report by Reuters published this week, some Chinese firms are concerned that the change in FDI norms will affect their projects and investment deals in India. The investors are worried that any government approval might take months, leading to delays in projects. However, a source quoted in the article, who works closely with Chinese automakers, said, “Sentiment wise it’s not been taken well but it will not change the investment plans for now.”

In the short-term, India’s decision may affect liquidity in Indian firms – especially home-grown unicorns and start-ups. As per a media report, at least 18 out of 23 Indian start-ups, including Paytm, Snapdeal, Ola, Swiggy, Zomato, and Big Basket are backed by leading Chinese investors, such as Alibaba, Tencent, and Ant Financial.

Chinese investments are a part of the technology ecosystem – in start-ups, mobile apps, and smartphone manufacturing and assembly, to name a few. While investments may be affected for now, it is unlikely that China will stop investing in India, or that India will block investment proposals from Chinese firms. This revised policy is a measure to ensure that the Indian economy stays protected during the COVID-19 outbreak.

This is evident from the fact that leading automobile makers from China are going ahead with their India investment. As per a report in Economic Times, Shanghai Automotive owned-MG Motor and Great Wall Motors are on track with their India plans, while Changan and Chery are also looking for opportunities to set up base in India.

Will foreign firms looking to exit China relocate to India?

Meanwhile, foreign companies are increasingly looking at India as a viable investment destination as more investors seek to exit China in the wake of the COVID-19 outbreak and its political management.

Around 1,000 foreign firms are presently engaged in conversations with Indian authorities, and at least 300 are actively pursuing production plans in India – in sectors such as smartphones, electronics, medical devices, textiles, and synthetic fabric.

India has introduced various schemes, including three schemes for electronic manufacturing worth US$6 billion, to boost its domestic manufacturing, attract foreign investment, and to become a leading manufacturing and production hub.

With economies such as the US and Europe taking a significant hit, foreign investors will look for destinations with lower operation and production costs and a local supply chain in place. This requirement can be met by India as incentives allow fast tracking of manufacturing, especially in special economic zones (SEZs) and free trade zones.

(The article was originally published on April 21, 2020 and was last updated on April 24, 2020 to include the latest developments.)

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.