20 April, 2020
15 Min Read
Part of: GS-III- Economy - FDI (PT-MAINS-PERSONALITY TEST)
China’s footprint in the Indian business space has been expanding rapidly, especially since 2014.
The major Chinese investments in India span a range of sectors with a significant share in the start-up space. A 2017 survey of Chinese enterprises in India by the Industrial and Commercial Bank of China’s Mumbai branch found that 42% were in the manufacturing sector, 25% in infrastructure and others in telecom, petrochemicals, software and IT.
Threat due to the COVID-19 pandemic: Many Indian businesses have come to a halt due to the lockdown imposed to contain the COVID-19 pandemic. Subsequently their valuations have plummeted. Many such domestic firms may be vulnerable to opportunistic takeovers or acquisitions from foreign players. Recently, People’s Bank of China made a portfolio investment through the stock market into the housing finance company HDFC and now holds a 1.01% stake in the company.
**India shares land borders with Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh and Myanmar.
FDI new rules analysis
The revised FDI policy makes prior government approval mandatory for FDI from countries which share a land border with India. The objective is to curb opportunistic takeovers or acquisitions due to the current COVID-19 pandemic. This is indeed a risk that has also been identified by other countries.
Though well intended, the policy outlined in the press note released by the Department for Promotion of Industry and Internal Trade (PT SHOT) may have some unintended consequences.
Aimed at China:
The amended FDI policy does not restrict its application to only the takeover of vulnerable companies. The amended policy makes every type of investment by Chinese investors subject to government approval. Such a blanket application could create unintended problems.
1. The new policy does not distinguish between Greenfield and Brownfield investments.
2. The new policy does not distinguish between listed and unlisted companies. It also does not distinguish between the different types of investors, such as industry players, financial institutions, or venture capital funds.
3. The restrictions on Venture capital funds may impact the prospects of many start-ups in the Indian market.
Applicability with respect to certain funds:
Will further drive down evaluations:
Consequences for the companies:
Future foreign investment:
Foreign direct investment (FDI)
It is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country. Foreign direct investment can be made by expanding one’s business into a foreign country or by becoming the owner of a company in another country.
Review of FDI policy on various sectors (August 2019)
Major Impact and Benefits from FDI Policy Reform
FDI is a major driver of economic growth and a source of non-debt finance for the economic development of the country. Government has put in place an investor friendly policy on FDI, under which FDI up to 100% is permitted on the automatic route in most sectors/ activities. FDI policy provisions have been progressively liberalized across various sectors in recent years to make India an attractive investment destination. Some of the sectors include Defence, Construction Development, Trading, Pharmaceuticals, Power Exchanges, Insurance, Pension, Other Financial Services, Asset reconstruction Companies, Broadcasting and Civil Aviation.
These reforms have contributed to India attracting record FDI inflows in the last 5 years. Total FDI into India from 2014-15 to 2018-19 has been US $ 286 billion as compared to US $ 189 billion in the 5-year period prior to that (2009-10 to 2013-14). In fact, total FDI in 2018-19 i.e. US $ 64.37 billion (provisional figure) is the highest ever FDI received for any financial year.
Global FDI inflows have been facing headwinds for the last few years. As per UNCTAD's World Investment Report 2019, global foreign direct investment (FDI) flows slid by 13% in 2018, to US $1.3 trillion from US $1.5 trillion the previous year - the third consecutive annual decline. Despite the dim global picture, India continues to remain a preferred and attractive destination for global FDI flows. However, it is felt that the country has the potential to attract far more foreign investment which can be achieved inter-alia by further liberalizing and simplifying the FDI policy regime.
In Union Budget 2019-20, Finance Minister proposed to further consolidate the gains under FDI in order to make India a more attractive FDI destination. Accordingly, the Government has decided to introduce a number of amendments in the FDI Policy. Details of these changes are given in the following paragraphs.
As per the present FDI policy, 100% FDI under automatic route is allowed for coal & lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities permitted under and subject to applicable laws and regulations. Further, 100% FDI under automatic route is also permitted for setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.
It has been decided to permit 100% FDI under automatic route for sale of coal, for coal mining activities including associated processing infrastructure subject to provisions of Coal Mines (special provisions) Act, 2015 and the Mines and Minerals (development and regulation) Act, 1957 as amended from time to time, and other relevant acts on the subject. "Associated Processing Infrastructure" would include coal washery, crushing, coal handling, and separation (magnetic and non-magnetic)
Contract manufacturingThe business model in which a firm hires a contract manufacturer to produce components or final products based on the hiring firm’s design. Companies outsource their production to other companies. Contract manufacturing offers a number of benefits:
Single Brand Retail Trading (SBRT)
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