After foreign direct investment (FDI), the government is looking to clamp down on unbridled access to the Indian market by Chinese portfolio investors as it seeks to plug a possible loophole that investors from across the border can use to acquire shares in listed domestic companies.
The finance ministry is looking at options, including the possibility of mandating the “approval route” for Chinese foreign portfolio investment (FPI) as well. FPI investors typically acquire smaller shares and keep churning their investment. The government will initiate the steps in consultation with market regulator Sebi.
In contrast, FDI is a more long-term and stable source of funding, which the government had recently blocked for Chinese investors through the automatic route and mandated that direct investment from countries that share a border with India will only be permitted with prior government approval. Although the move will leave Taiwan investment out of the ambit, Hong Kong will be covered by the guidelines.
Sources said that plugging this gap was important as the government wanted to ensure that a group of investors blocked via the FDI route do not use the FPI option to gain significant ownership in a company. Besides, the department for promotion of industry and internal trade (DPIIT) is looking to define “beneficial ownership” of shares in line with the provisions of the Companies Act. So, companies where Chinese citizens own over 10% cannot escape prior government approval even if the funds are coming via a third country such as Singapore or the US.
Under Indian laws, there are two definitions of “beneficial ownership” with the Prevention of Money Laundering Act being more liberal than the recently-notified rules under the Companies Act. The often opaque participatory notes are one of the instruments where the FPI policy will have to be watched.
The amendments to the FDI rules were necessitated by the fear among officials as well as businesses about possible takeover attempts by Chinese companies of Indian entities where share prices had fallen after the coronavirus outbreak.
Several other countries - from Italy and Germany to Australia and Japan - have set up screening mechanisms to block possible takeover bids by Chinese investors, many of whom are suspected to be extended arms of the state. Although Indian authorities had begun work months ago, acquisition of over 1% stake by People’s Bank of China in HDFC Bank was seen as one of the triggers for speeding up the FDI policy change last month.
