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FOREIGN DIRECT INVESTMENT- POST COVID SCENARIO

The Government of India launched the Make in India campaign in the year 2014, with a view of making India a global manufacturing hub, by encouraging the multinationals and domestic companies to manufacture their products in India. In recent years, Government of India has taken a plethora of steps to revamp its Foreign Direct Investment (FDI) Policy. In addition to easing of sectoral cap regulations, easing of rules and regulations, these include the reduction in corporate tax rates and increased investment in infrastructural facilities. 

The Covid-19 outbreak on global economy is something which no one could have anticipated and its impact is brewing the economy into a zone of recession. With Covid-19 outbreak being declared as pandemic, many businesses in India are amid fears of opportunistic takeovers/acquisitions. The Department of Promotion of Industry and Internal Trade (DPIIT) has by the Press Note No. 3 dated 17th April, 2020 curbed opportunistic takeovers/acquisitions of Indian Companies due to Covid-19 pandemic. 

The present Foreign Direct Investment (FDI) Policy of India, allowed investment in all sectors, except for prohibited sectors, like atomic energy, defence, space etc., either through automatic route (without any prior approval) or through approval route (with prior approval).  But with the Press note no. 3 of 2020, the revised position reads as below:

“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 an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.”

The FDI Policy has basically just made the norms stringent and not restricted the investment from neighboring countries, which shares borders with India, like China, Nepal, Bhutan, Pakistan and Afghanistan, Bangladesh and Myanmar. 

Sl. No

Name of the Country

Investment in India (In Crores)

1

China

15,112.07

2

Myanmar

35.78

3

Nepal

18.46

4

Afghanistan

16.55

5

Bangladesh

0.48

Source: FDI Fact Sheet, DPIIT

With Pakistan and Bangladesh already being restricted under the existing FDI policy, the new amendment is now aimed at preventing takeovers by all the neighboring countries surrounding India, including that of China. Of all the above countries, China’s has been the highest investment in India at present, in terms of neighboring countries and has the financial capability to indulge in takeovers/acquisitions.  


Also, it may be noted that the new amendment comes at a point when the Securities and Exchange Board of India (SEBI) increased the scrutiny of investments from China and Hong Kong in Indian entities.

Moreover, the news of the People’s Bank of China raising its stake in a major Indian lender had been met with a lot of suspicion which resulted in speculation (not completely unfounded) that Chinese companies could try and possibly takeover Indian companies during this time of the pandemic.

Additionally, India is not the first country which has taken the drastic step, Australia and several countries in Europe have already put in place plans and concrete measures to stop such opportunistic takeovers/acquisitions.

Chinese Investments are deep rooted in Indian economy, majority being in tech companies, startups and applications(apps). According to the Ministry of Corporate Affairs’ “Invest India data”, Chinese IT and tech companies like Xiaomi, Oppo, Vivo, and Huawei have secured 100% FDI in contract manufacturing in India and have set up plants in Greater Noida, Andhra Pradesh and Tamil Nadu, while Chinese auto companies like MG motors, BYD auto, Colsight, YAPP Automobiles, among others, have been some of the companies that have grown quite fast in India over the last few years.

Considering, the new amendment in FDI Policy, the India-China LAC Stand-off and India’s ban on 59 Chinese based applications, have hurt the economic sentiments of Chinese investors. 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.

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, considering the new amendment being temporary to manage the burden of pandemic and ensuring the economic security.

On the other hand, 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. 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.

This revised policy is a measure to ensure that the Indian economy stays protected during the COVID-19 outbreak. Changes in FDI rules is necessary to ensure no Indian entity is shortchanged during COVID19 pandemic especially by opportunist China.

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.

With Unlock-2.0 the Government of India plans to operate its economy along with pandemic, yet there are lot of challenges faced by the Indian economy. The fear of the pandemic among the netizens, the economic revival package, extended date of compliances, improvising & revamping the health care sector of the Country will play an important role in restarting the economy.