New Delhi: While India’s tweaks to its foreign direct investment (FDI) policy are publicly aimed at curbing ‘opportunistic’ takeovers of distressed domestic firms, the changes also appear to be creating new roadblocks for a number of sectors ranging from manufacturing to consumer technology.
Senior industry executives and legal experts The Wire spoke to said that there will be substantial collateral damage from the Narendra Modi government’s move to scrutinise and approve all forms of Chinese foreign direct investment.
These side-effects, which may or may not have been intended by the Centre, will slow the pace of foreign investment at a time when the Indian economy needs it the most.
There are broadly two types of issues that are cropping up and may require further clarification by the government.
The first is the flow of Chinese investment — largely in the form of venture capital — into Indian technology start-ups. According to estimates by think-tank Gateway House, more than half of India’s 30 pre-COVID19 unicorns have a Chinese investor.
Over 75 Indian companies, with Chinese investors concentrated in e-commerce, fintech, media/social media, aggregation services and logistics, according to their November 2019 report.
Indian Unicorns with Chines… by The Wire on Scribd
“This could impact those Indian companies in which the entities from these countries, including China, have already made investments… Investors and the Indian companies could feel this change as a dampener as original investment was in the automatic route regime and now additional investment in the same Indian company will come under government approval,” said Lalit Kumar, partner at law firm J. Sagar Associates.
The biggest names among those that could be affected include digital payments platform Paytm, ride-sharing company Ola and online grocery retailer BigBasket, all of which have received billions of dollars in investments from Chinese companies.
Indeed, industry insiders say that fresh investments in these companies from existing investors will now face additional scrutiny, which in turn could drastically increase the timeline for completing a deal.
A senior executive of an Indian unicorn that has taken Chinese investment said the move may put all big companies in a spot as it will now force top government officials to make decisions in sectors that may not have national security implications.
“It is one thing to have a policy that says the Chinese cannot invest in X, Y and Z sectors that affect India’s national security interests. But now, Indian government officials will also be forced to think whether we want Chinese money in a taxi aggregator like Ola even if there is no obvious threat. Who knows who the government will be influenced in matters like this? Will it listen to people in the swadeshi lobby,” said the executive.
“For tech companies in which Chinese investors own a strategic stake, say 30% or more, it puts them in a really tight spot. They will have to seriously consider how they want to raise more money.”
Another closely connected issue is that if Chinese FDI is seen as being more time-consuming and riddled in red tape, it lowers the number of options that an Indian company has when it comes to fund-raising or an exit in terms of acquisition. This, experts say, makes the whole process less competitive, thus resulting in sub-optimal and less profitable outcomes.
“Making government approval necessary for acquisitions in private companies by Chinese investors will only reduce the number of potential investors available for a prospective seller, and drive down the valuation. The absence of a white knight may cause bankruptcy and job losses,” said Santosh Pai, Partner, Link Legal India, who advises foreign investors including those from China.
For bigger companies like Paytm, depending on Chinese FDI is a bulwark against investments made in the payment space from American rivals such as Walmart-owned PhonePe and Google. Any restriction on investments by the company’s single largest shareholder, Alibaba, could likely stifle Paytm’s growth.
Some experts, however, believe that it will be net-net positive for India Inc considering the troubling economic atmosphere in light of COVID-19.
“Such restriction is warranted at least during the time India Inc recovers and stands on its feet again. This shield would also apply to companies in the consumer retail and automotive where FDI was otherwise under the automatic route,” said Anil Talreja, Partner, Consumer Business, Deloitte India, who added that he expected this measure to be temporary and not a long-term permanent fixature.
Chinese greenfield investment
Indeed, the second issue that is has rippling consequences is that the new rules are not narrowly focused and now impact all sectors that earlier were under the automatic route. For instance, the new FDI policy erects roadblocks for greenfield projects, expanding existing facilities in India and the joint ventures that Chinese companies have here in the infrastructure space.
For instance, if a new Chinese mobile phone company wishes to come into India and set up an assembly plant, this will now require government approval. Under the earlier rules, it did not require any specific permission as 100% FDI in manufacturing was allowed.
“These are investments where Chinese investors bring fresh capital to establish new factories and generate employment in India. China has been the fastest growing source of FDI since 2014. The positive sentiment generated among industry players in China since then may well be punctured by the need for government approval,” Pai notes.
How much is at stake here, if the government red-tape decides to slow things down? Until 2014, total Chinese investment in India was $1.6 billion, according to official figures. Most of the investment was in the infrastructure space, involving major Chinese players in this sector, predominantly state-owned enterprises.
Over the last few years however, experts say this has increased five-fold to at least $8 billion according to data put out by Beijing, with a demarcated shift from state-driven to market-driven investment from private Chinese players.
But even this is likely an underestimate, according to a research paper put out by Brookings India.
“It is possible to estimate that the total investment from China exceeds official figures by at least 25% When announced projects and planned investments are included, the total current and planned investment is three times the current figure, crossing at least $26 billion,” a Brookings India research study notes.
“In greenfield investments and capital invested in acquiring or expanding existing facilities in India, Chinese companies have invested at least $4.4 billion. Chinese companies have also invested in acquiring stakes in Indian companies, mostly in the pharmaceutical and technology sectors, and participated in numerous funding rounds of Indian startups in the tech space. Another US$15 billion approximately is pledged by Chinese companies in investment plans or in bids for major infrastructure projects that are as yet unapproved.”
As the study notes, even these figures are still an underestimate as there are a number of imitations in the “exercise of mapping Chinese investments in India”. This includes the fact that many Chinese companies prefer to invest through their Singapore subsidiaries — like mobile firm Xiaomi, which invested Rs 3,500 crore in India in FY’19.
Did the Modi government intend to scrutinise and put up a few barriers on Chinese investment in greenfield projects?
While there has been no official word from the commerce or external affairs ministry, Niti Aayog chief Amitabh Kant on Monday afternoon appeared to indicate otherwise.
In an interview to television channel CNBC, Kant said that India still welcomes investment from everywhere including China, in what appears to be a slight dialling down of the rhetoric that was seen after the People’s Bank of China increased its stake in HDFC in the recent January-March quarter.
“Better that Chinese companies invest in India rather than export from India. We realise that India needs equity and FDI….If China comes in and [does] greenfield investment, we would welcome that. All Chinese companies manufacturing in India should continue to do so,” the top Niti Aayog official told the business channel.