Guru Gyan
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Guru Gyan

#India’s tweaked FDI policy and increased scrutiny

The centre has restricted norms for foreign direct investment (FDI) in Indian companies to protect them from *hostile takeovers due to the ongoing Covid-19 pandemic. Companies located in countries that share a border with India can invest only via the government route and not the automatic route.

*Hostile takeover is a type of merger/acquisition in which the board or management is opposed to the acquisition.

The old & the new

The existing FDI policy for investments from India’s neighborhood was confined to Bangladesh and Pakistan. The new recent policy has now brought China, Nepal, Bhutan and Myanmar within its scope.

The transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, will also require government approval, the Ministry of Commerce and Industry said.

Note, the policy is tweaked only for the countries that share land borders with India.

FDI policy context & numbers

In August 2019, the cabinet had approved the proposal to review India’s FDI policy on various sectors and permitted 100% FDI via *automatic route in most sectors/activities like coal mining, contract manufacturing, insurance subsidiaries and such.

The Global Investment Trend Monitor report compiled by the United Nations Conference on Trade and Development (UNCTAD) stated that India recorded a 16% increase in inflows to an estimated $49 billion in 2019. The majority went into services industries, including information technology. Singapore, Mauritius, Japan, The Netherlands are said to be the top investing countries in India.

*In automatic route, FDI is allowed without prior approval from the government or Reserve Bank of India (RBI) whereas a go-ahead from the government is a must in government route.

Increased scrutiny

Coming back to the reviewing end,
A per a letter accessed by Livemint, market regulator Securities and Exchange Board of India (SEBI) has sought details of foreign portfolio investments from China, Hong Kong, and a few other Asian countries.

Last week, there were reports that SEBI had sought specific details investments coming from China or via China into the Indian stock market. The exact level of China’s investment through direct and indirect route is not in public knowledge, the reports stated.

On the other hand, China is not in the top 10 countries that invest in India, National Securities Depository Limited (NSDL) data showed.

Note, FDI is regulated by the finance ministry, while foreign portfolio investments are under SEBI. There have been no restrictions out on FPI investments as yet.

Not just India, Canada and some countries in Europe have also announced new measures over the weekend to add scrutiny on foreign purchases and investments.

The following response

The Chinese Embassy on Monday released a statement in which it said that India’s new FDI rules for specific countries are in violation of the World Trade Organization (WTO) principles. The move is discriminatory and against free and fair trade, it said. The statement asked for a ‘revision of discriminatory practices’ and asked India to treat investments from different countries equally.

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