Ending opportunism

The government moved last week to block the “opportunistic” takeover of Indian assets during the ongoing Covid-19 pandemic and associated slowdown. In a notification, the Department of Promotion of Industry and Internal Trade has ruled that an entity of a country that shares land borders with India or where the beneficial owner of an investment in India is situated in or is a citizen of any such country, can invest only under the government route. This means that automatic investment under the foreign direct investment route is forbidden, and that special government approval will be needed. While the notification specifies any country which shares a land border with India, there is little doubt that this is not aimed at Bangladesh or, say, Nepal. It is about takeovers from China, and its embassy’s reaction to India’s decision underlined that intent. Its spokesman said that the new restrictions violated the World Trade Organization’s principles of non-discrimination and do not conform to the consensus of G20 leaders and trade ministers. However, the government’s action will be received well. India, in fact, joins the ranks of several countries which have taken similar steps of ensuring more vigilant control over foreign investments, particularly from China.

It is certainly a fact that this will create problems for the mobile sector, for example. In the tech sector too many start-ups have grown accustomed to Chinese money — 18 of the 23 unicorns have tapped funding from China. And, in theory, it is dangerous to set up barriers to investment in India. However, these are not normal times, nor is investment from mainland China necessarily normal investment. The danger was brought home recently by the decision on April 11 by the People’s Bank of China to buy 17.5 million shares worth over Rs 3,000 crore in Housing Development and Finance Corporation (HDFC), taking its stake to over 1 per cent. HDFC is, after all, an important part of the Indian financial system. While the government notification is valuable, it will not be straightforward to implement, as the follow-up from the markets regulators shows. Portfolio investment also requires attention, and the Securities and Exchange Board of India has reportedly written to custodians, demanding information as to whether funds from several Asian countries are in fact controlled by a Chinese investor. 

It is important in this context to note two things. First, India’s decision on “opportunistic” takeovers is not out of line with global trends. Many countries are being cautious about strategic investment at this time. Given the dips in valuation associated with the coronavirus-induced recession, cash-rich companies are on the lookout for takeovers. This is not necessarily a bad thing — distressed debt funds, for example, should not face any restriction on their activity because they perform an important market function. But the experience following the last financial crisis in 2008-09, when Chinese entities used Beijing’s massive stimulus funding to swoop in and buy critical assets across the world, needs to be taken into account. While there is some merit in the argument that the government cannot be seen as mixing politics with economic policies, that too without any benefits either way, the fact is that China is not a market economy when it comes to strategic takeovers abroad: The government and even the military have both an explicit and an implicit control over how the private sector chooses to operate. This needs to be taken into consideration, and the government should continue to close loopholes in its action. 

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