FDI rules: National security in focus as India amends FDI rules

FDI rules: National security in focus as India amends FDI rules


NEW DELHI: India’s decision on Saturday to amend FDI rules requiring government approval for entities from countries that share a land border — read more specifically as China — is not only an attempt to protect vulnerable assets from predatory acquisitions but a recognition that in the wake of the Covid-19 crisis India needs to draw a careful line between economic openness and national security.

Alarm bells regarding Chinese investments and control have been ringing from some time, but it took a pandemic for the government to address what is seen as a strategic, and possibly a political, vulnerability. The concern came to a head with the Public Bank of China’s acquisition of 1% of HDFC – as foreign portfolio investment – on behalf of the country’s sovereign wealth fund SAFE. India is not alone as Australia, Germany, France, Spain and even UK have acted to screen investments. A report by Gateway House, a think tank, raised red flags recently in a report that said Indian tech, retail and fintech start-ups have got close to $ 4 billion from Chinese investors since 2015.

The concern, however, is even greater with regard to national security as reports have pointed to threat of data being siphoned off, opaque tech and blurry financial holdings. There were long deliberations over allowing Chinese giant Huawei to take part in India’s 5G trials. The possibility of security vulnerabilities has moved up the graph as far as the government is concerned and this led to a barrier against Chinese FDI.

The Gateway report warns, “Unable to persuade India to sign on to its Belt and Road Initiative, China has entered the Indian market through venture investments in start-ups and penetrated the online ecosystem with its popular smartphones and their applications.” In March, reports said the Industrial and Commercial Bank of China and China Investment Corporation were scouting for investment opportunities in the financial services sector in India on behalf of Chinese investment funds. Earlier this week, government asked for actual identities of beneficial owners of funds, particularly from China.

Sources involved in the decision told TOI that the government believes the Indian economy could stay vulnerable for a while as it recovers from the double whammy of a slowdown and the pandemic. The crisis has brought home to India and other countries that national security goes beyond defence, and that India’s economic and commercial policies will now be seen through a national security filter.

In fact, the pandemic has drawn attention to India’s worrying dependence on China as the government tries to source equipment and components. India’s pharma sector is in hock to active pharma ingredients from China. Even HCQ, of which India is the world’s largest manufacturer, needs KSM (key starter materials) to be imported from China. It was only after India received a huge amount of this that production actually took off, allowing India to practise its medical diplomacy.

Around the world, similar fears are prompting governments to tighten investment norms. Australian treasurer Josh Frydenberg said the government would crack down on Chinese state-owned businesses going after Aussie assets and declared there would be a zero dollar approval threshold for all proposed foreign investments of Australian businesses. In early April, the British government prevented a Chinese fund from taking over a key chip manufacturer. Reports have suggested that China is eyeing sectors, start-ups and small niche tech companies that will synergize with its bid to become a full-spectrum tech giant by 2025, a program called Made in China 2025.

India’s massive retail market along with fintech, specialty chemicals, electric mobility and pharmaceuticals are believed to be of particular interest to Chinese investors.





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