Govt amends FDI policy to stop opportunistic buying in Indian firms

The coronavirus pandemic has upended global economies and roiled stock markets worldwide which have now triggered opportunistic buying of stakes in companies through open market transactions.

Recently, China’s state-run People’s Bank of China had raised its stake in HDFC to a little over 1% taking advantage of the dip in Indian stock markets. The transaction triggered a backlash in India with many including political leaders asking for steps to be taken to counter this threat. 

In its response today, the government has amended its Foreign Direct Investment policy barring such opportunistic deals, a move which is being seen as countering threats from China.

India’s Department for Promotion of Industry and Internal Trade or DPIIT has notified the changes and said that “countries which share a 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”.

While India shares its border with several countries, the move is largely an attempt to prevent Chinese companies or entities backed by its government from buying stakes in Indian companies via the automatic route. 

Between January and March this year, People’s Bank of China had bought 1.75 crore shares of the country’s biggest housing mortgage lender HDFC.

According to media reports, China-backed funds are eyeing to acquire stakes in India’s financial sector as the valuation of most of the companies have been impacted adversely. 

The changes announced by India in its FDI policy comes at a time when European countries such as Italy, Spain and Germany have tightened their foreign investment rules to check hostile takeover of their companies by Chinese firms.

Though the tweaks made by India to its FDI policy is aimed at protecting its companies from becoming easy targets, the move will likely impact funding flowing from China into Indian startups.