The government of India has amended the Foreign Direct Investment rule to discourage opportunistic investment by neighboring countries in Indian companies in the middle of the Corona virus outbreak. The Indian government has instructed that investment from neighboring countries including China would now require government approval. China says India’s new rules for foreign investment has violated the WTO principles of non discrimination and are against free and fair trade. India’s department of promotion of industry and internal trade (DPIIT) while revising the country’s Foreign Direct Investment (FDI) regulations had stated that “an entity of a country which shares a land border with India or is a citizen of any such country or where the beneficial owner of an investment into India is situated in, can only invest under the government route. In the new policy amendments, companies in countries that share a border will have to approach the government first for investing in India instead of taking the automatic route. India did not specifically name China but it was very clear that move was meant only at preventing hostile takeovers by Chinese companies in India whose market value has dipped because of covid-19 outbreak related uncertainties. This step has taken after similar change in regulations by countries such as Germany, Australia, and the Czech Republic in recent months. The decision has come out at the back of People’s Bank of China recently raised its stake from 0.8% to 1.01 % in India’s largest non banking mortgage provider Housing Development Finance  Corporation (HDFC). The existing Foreign Direct Investment (FDI) policy was confined to Bangladesh and Pakistan while these new policies bring China, Bhutan, Nepal and Myanmar within its ambit. There is a lack of clarity that makes questioning if the note was a well thought out strategy or a knee jerk reaction. Also the companies with existing investment from China can raise funds by way of rights issue without government approval? If any Indian firm is a subsidiary of a Chinese company, how will they raise capital in the future? The fact is that if a parent company is a Chinese corporation than it won’t change even if government of India doesn’t grant approval for a future fund raises. This becomes relevant to the companies that don’t have their roots in China but are indirectly managed by Chinese corporations. The revised policy also clears that “In the transfer of any ownership of existing or future Foreign Direct Investment (FDI) in an entity in India, indirectly or directly, beneficial ownership falling within the restriction or purview of the para 3.1.1(a) such following change in beneficial ownership will also need government approval. General Agreement on Trade in Services (GATS) pointing out that these policies was not related to national treatment or market access restriction. Formally a different procedure is only prescribed.
By these allegations of violating the Bilateral Investment Treaty the India-Nepal and India-China alliance has been terminated. The treaty only applies to those investments which already made in India before the termination, not retrospectively. Earlier the policy states that a non resident entity can invest in India, subject to the FDI Policy except in those activities/sectors which are prohibited under the rules. However, a citizen of Bangladesh or an entity of Bangladesh can invest in India only under the Government approval. Further any entity of Pakistan or citizen of Pakistan can also invest in India only after the approval of government, in activities/sectors other than atomic, defence, energy space and sectors/activities prohibited for foreign investment. After the notification of Foreign Exchange Management Act (FEMA) the decision will take into effect. Where companies have to operate and invest all depends on the country’s economic fundamentals and business environment. Facing the economic downturn caused by COVID-19 pandemic, countries should have to work together to create a positive investment environment to boost up the resumption of companies operation and production. Securities and Exchange Board of India (SEBI) was examining equity transactions by Chinese companies and banks in India. Such transactions have come under the notice when the share prices of companies have dropped due to the economic impact of the Covid-19 pandemic. India took the step in the conditions of growing concern across whole the world that Chinese companies are buying assets at cheap price, distressed assets slammed by the COVID-19. Countries like as Germany and Australia have also tightened their FDI policies rules and imposed restrictions on Chinese companies buying assets.