By: Jasmine Walia, UILS, Panjab University
Foreign direct investment(FDI) is a type of investment where the investor invests in a company of some country other than his own. Investment of 10 percent or more through eligible instruments made in an Indian listed company would be treated as FDI(1).
It isn’t merely putting money into assets in another country but involves a lasting interest and ownership. Foreign direct investments bring in new technology, tech know-how, skills, job opportunities, and improved infrastructure.
Under FDI, the investors hold a certain degree of influence on the management of the enterprise where the investment is being made as the foreign investor is given at least 10 percent voting rights in the daily functioning of the firm to uphold the lasting interest.
But we should know that FDI has a few downsides as well such as the risk of increased capital outflows, disruption of domestic business practices, and even risk of interference by foreign governments, which would be the primary focus of this paper.
The first part tells about the current status of Chinese investments in India along with the concerns that arise, the second part reports the steps taken by GOI such as amending the FDI policy and banning some Chinese applications. In the third part, I would elucidate FDI policy regulations in India.
CHINESE FDI IN INDIA
The percentage of Chinese FDI inflows is only 0.52%(2) which appears to be negligible compared to the economic footprint of Mauritius or Singapore. We have to understand that these investments are not made in the infrastructure but the tech sector mostly making an impact disproportionate to its value, given the growth of technology across sectors in India.
In a study by Gateway house, the findings were extraordinary: 18 of the 30 Indian unicorns have a Chinese investor. This implies that China is deep-rooted in the Indian economy and the technology ecosystem that influences it3. Unlike physical infrastructure, these are imperceptible assets – made by the private sector and are rarely over $100 million so don’t cause immediate alarm.
It is tough to evaluate the actual investment inflow from China and Chinese companies into the technology sector because many investments are directed via Hong Kong or other third-party countries. To further complicate the situation in India, there are different routes available for foreign direct investments – through the automatic route or the approval route, where the government’s consent is required as a result of which different ministries have incomplete country-wise statistics(4).
Indian startups require foreign investment because the Indian venture capitalists are not large enough to make the huge commitments needed to finance start-ups through their early losses. Also the Chinese see Indian markets similar to their own in terms of consumer behavior, stage of development, and e-commerce requirements. India’s market is seen as similar to China’s in terms of size, viewed by many Chinese tech firms as the next big thing(5).
National Security concerns with Foreign investments are typically associated with takeovers of domestic firms, mergers, and acquisitions, instead of new investments known as greenfields.
One of the major concerns with the Chinese investments in India is an information security and data protection. There have been incidents where tik tok a Chinese app was caught stealing contents off people’s clipboards(6).
Another issue is the storage of sensitive data in foreign servers by these applications. Not to mention that the separation between the private business and the Chinese state is unclear so we don’t exactly know who or what we are dealing with. Many business heads in china are offered positions and memberships in politics.
Largely ceremonial, but the membership symbolizes a political recognition by the party and the state. The selection of these business leaders is a way to ensure that private companies cooperate with policy goals, including that of gaining a tighter grip over cyberspace(7).
Now coming to the COVID times, since we understand that there was a sharp fall in the valuation of the listed Indian companies they could have been easily acquired by the Chinese. It was a wake-up call for the government of India when the People’s Bank of China(PBOC) acquired over 1% shareholding in the Housing Development Financial Corporation (HDFC)* which is one of the Domestic Systemically Important banks of India.
The issue raised after this deal was why would a central bank buy a stake in a commercial establishment.
* it should be noted that People’s Bank of China (PBOC), after raising its stake in HDFC in April, has now trimmed it to below 1 per cent. Experts believe that the trimming of the stake could have been done to avoid public glare in the wake of souring India-China relations.
ACTIONS TAKEN BY THE INDIAN GOVERNMENT
The ministry of commerce and industry reviewed the FDI policy and amended para 3.1.1 of the existing policy to curb “opportunistic takeovers” of Indian Companies during the COVID-19 pandemic. As per the amendment “A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route(8).”
This step was welcomed by the Indian companies however the Chinese called it discriminatory.
The revision of the policy doesn’t mean that the Chinese can no longer invest in our country it just ensures that now they cannot invest directly and require prior approval from the concerned ministry or department of GOI. This will allow the government to scrutinize the investments and approval shall be given on a case by case basis.
On June 29,2020, the ministry of Information Technology, in view of the emergent nature of threats decided to block 59 Chinese apps(9). These apps include tik tok, UC browser, and even Shareit to name a few. Concerns regarding the security of data and risk to privacy relating to the operation of certain apps The Indian Cyber Crime Coordination Centre, Ministry of Home Affairs sent an exhaustive recommendation for blocking these malicious apps.
This step was applauded not only by concerned citizens but at an international level by countries like the US.
It is unclear whether these decisions are permanent or might be reversed later after the India-Chinese tension at the border de-escalates.
We have a long way to go therefore the government needs to come up with a balanced and transparent regulatory framework aimed at all overseas investments. This will ensure security and privacy along with the advantages of sizable foreign investments in India.
The government could create a body akin to CFIUS(10). This body could have members from various ministries who could review foreign investments which call for the collection of private information or pose any security threat. This might help tackle the security threats related to foreign investment in India.
REVIEW PROCESS OF FOREIGN DIRECT INVESTMENT IN INDIA
Foreign Investment in India is regulated with regard to clause (b) sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017(11).
These Regulations are revised time and again to include various changes in the regulatory framework and are published through amendment notifications.
Who can invest in India?
Schedule 1-10 of FEMA mentions the various non-resident entities that are allowed to invest in India.
Who cannot invest in India?
As per latest developments, an entity of a country which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country can invest only under the Government route(12).
This implies that entities from China, Bhutan, Nepal, Pakistan, Bangladesh, and Myanmar can not invest directly and can invest only under the government route in sectors/activities other than defense, space, atomic energy, and sectors/activities prohibited for foreign investment. Earlier such conditions were applicable only to entities from Pakistan and Bangladesh.
There are two entry routes for foreign investment- Automatic route which requires no approval but the companies have to report the investment and the other route is the Approval route or the government route in which prior approval has to be sought from the competent authority.
FDI beyond sectoral caps also requires prior Government approval.
Reporting under Automatic route
Any Indian entities which receive foreign investment are required to fill in the single master form released by the RBI. The single master form provides one common platform for all reporting. Indian entities not complying with this precondition will not receive the foreign investment and will be non-compliant with FEMA(1999) and regulations made thereunder.
The rundown on Procedure under the approval route
As per the Standard Operating Procedure (SOP) for Processing FDI Proposals(13) firstly the applicant would be required to submit the proposal for foreign investment by filling in an online application form on the foreign investment facilitation portal.
After receiving the form DIPP would identify the competent authority and send them the proposal within 2 days. It could be digitally signed or one signed copy of the form has to be submitted within 5 days of communication by the department of promotion of industry and internal trade.
In case the signed copy isn’t filed with the competent authority within 7 days after communication by DIPP the date of filing of the physical application would be considered as the reference date for calculation of time limits.
Competent Authorities for Approval of Foreign Investment and the relevant time limits are clearly mentioned in the Standard Operating Procedure (SOP) for Processing FDI Proposals issued by DIPP.
Security clearance from the Ministry of Home Affairs is required in investments from countries that share a land border with India. Investments in critical sectors such as defense, civil aviation, telecommunication, Satellites-establishment and operation, private security agencies, broadcasting, and Mining & mineral separation of titanium bearing minerals and ores, its value addition and integrated activities also require a security clearance.
Approval/rejection letters will be sent by the competent authority to the applicant by the concerned ministries/departments and DIPP.
This paper talks about foreign direct investment from China in India. How the amount of investment is insignificant but has a significant value, given the growth of technology across sectors in India. Then we discuss the various concerns like that of information security and data privacy, therefore, understanding the need to scrutinize investments from China.
The second part of the paper reports the recent steps taken by the government of India such as revising the FDI policy so as to curb the opportunistic takeovers of Indian firms in the COVID times and banning 59 Chinese apps citing threats to data privacy.
Part three of the paper gives a brief about the FDI regulations in India and the process of how the investors have to file for applications for government approval if required. The government should come up with a separate body so as to evaluate the security concerns and keep a record of all the transactions from foreign entities.
- Report of the Dr. Arvind Mayaram Committee On rationalizing the FDI / FII Definition, Ministry of Finance Department of Economic Affairs(2014)
2.Department for Promotion of Industry and Internal Trade, “ QUARTERLY FACT SHEET FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI) FROM APRIL, 2000 to JUNE, 2019”Ministry of Commerce and Industry(2019)
3.Ananth Krishnan, “Following The money: China Inc’s growing stake in India-China relations” Brookings India Impact Series 032020-01, March 2020. Brookings Institution India Center
4.Ananth Krishnan, “Following The money: China Inc’s growing stake in India-China relations” Brookings India Impact Series 032020-01, March 2020. Brookings Institution India Center
5.Ananth Krishnan, “Chinese Bear on Indian Trail”, India Today, June 16, 2016 https://www.indiatoday.in/magazine/neighbours/story/20160627-china-internet-giant-baidu-india-search-engine-829067-2016-06-16
6.Zack doffman, “Warning—Apple Suddenly Catches TikTok Secretly Spying On Millions Of iPhone Users” Forbes,Jun 26, 2020
7.Kenji Kawase, “In China, private companies walk a fine line”Nikkei Asian Review MAY 23, 2018
8.Department for Promotion of Industry and Internal Trade GOI, Press Note No. 3(2020 Series) https://dipp.gov.in/sites/default/files/pn3_2020.pdf
- Press information bureau “Government Bans 59 mobile apps which are prejudicial to sovereignty and integrity of India, defence of India, security of state and public order” 29 JUN 2020 https://pib.gov.in/PressReleseDetailm.aspx?PRID=1635206
- The Committee on Foreign Investment in the United States – CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons, in order to determine the effect of such transactions on the national security of the United States.
- Reserve Bank of India, Notification No. FEMA 20(R)/ 2017-RB https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11161&Mode=0
12.Department for Promotion of Industry and Internal Trade Press Note No. 3(2020 Series) para 3.1.1(a)
13.No. 1/8/2016-FC-1 Government of India Ministry of Commerce & Industry Department of Industrial Policy & Promotion 29 th of June, 2017