MUMBAI: Spooked by Chinese companies including the country's central bank and its sovereign funds shopping in Indian stock markets, the government has dropped foreign direct investment (FDI) coming from its neighbours from the automatic approval list.
Such investments will now need prior government approval.
Tweaking rules governing FDI in Indian companies, a release by Department of Promotion of Industry and Internal Trade (DPIIT) said this was being done to prevent hostile takeovers of Indian companies whose market values have taken a severe hit due to covid-19 related uncertainties.
"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," it said.
The move may impact investments from countries such as Nepal, Bangladesh, Pakistan, Sri Lanka, Myanmar, and Bhutan and more importantly China.
Until now, a non-resident entity or a foreign investor could invest in India, subject to FDI rules, except in sectors/activities which are prohibited. However, countries such as Bangladesh and Pakistan could invest only after government approvals and only in select sectors.
Pakistan is not allowed to invest in sensitive sectors such as defence, space and atomic energy.
"FDI restrictions from countries having a border with India was much anticipated. This is to prohibit particularly Chinese companies from directly or indirectly acquiring Indian companies, many of which have lost significant value due to the covid-19 crisis. This is line with what other countries like Australia have done," said Girish Vanvari, founder, Transaction Square, a tax and regulatory consultancy firm.
The latest move is part of a series of steps that the government has taken since the start of this week after Housing Development Finance Corp. Ltd (HDFC) said that People’s Bank of China (PBOC) had raised its stake in the home lender from 0.8% to 1.01% in the March quarter through open market purchases.
This led to many voicing concerns that India's systemically-important companies could be susceptible to takeover from foreign investors as their valuations have been hit given the correction in equity markets because of the pandemic and the consequent lockdown.
Foreign investments into India come via FDI and the foreign portfolio investment (FPI) route. While FDI is regulated by the DPIIT, FPI comes through the stock market and is regulated by Securities and Exchange Board of India (Sebi).
Sebi has increased its scrutiny of FPIs coming from China, Hong Kong and 11 other Asian countries.
There are a total of 16 Chinese FPIs registered in India with $1.1 billion invested in top-tier stocks. The exact level of China's investment through direct and indirect (beneficial ownership) routes is not in public domain. As for fund structures situated elsewhere in the world, Chinese investors could be beneficial owners.
"Sebi will also revive its first communication that investments coming from India's neighbours would require separate regulatory approval," said a person aware of the matter.
Currently Sebi adopts a hands-off approach in granting new FPI licences. If a fund is eligible under the rules then Sebi and the custodian grant approval.
Sebi had first issued this communication on Monday but by late evening had placed it in abeyance awaiting clarity from the government.