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4th March 2021 – Editorials/Opinions Analyses

Content

  1. Despite arbitration tug of war, mutual settlement is key

Editorial: Despite arbitration tug of war, mutual settlement is key

Context:

  • Recently, India’s Department for Promotion of Industry and Internal Trade revised its FDI policy in order to curb the possibility of predatory foreign investment exploiting the financial distress of COVID-19-hit Indian companies.

Relevance:

  • GS Paper 3: Foreign Investment

Mains Questions:

  1. Given increased FDI in India, it may not be conducive to weave a web of litigation, affecting stakeholders and exit routes. Discuss. 15 Marks

Dimensions of the Article:

  • FDI in Automatic vs. Government Route
  • Changes in FDI Policy
  • Concerns associated with these investments
  • Challenges in implementation of the policy
  • Way forward

FDI in Automatic vs. Government Route

  • Under the government route, foreign investor has to take prior approval of respective ministry/department.
  • Through automatic route, the investor just has to inform the RBI after the investment is made.
  • Also, Proposals involving FDI exceeding Rs 50 billion are placed before the Cabinet Committee on Economic Affairs irrespective of sector or country.

Changes in FDI Policy

  • The present policy states that a non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
    • Additional Provision: A citizen of Bangladesh and Pakistan or an entity registered in both countries can only invest under the government route.
    • Additionally, for Pakistan sectors/activities such as defense, space and atomic energy are prohibited for investment in addition to the sectors/activities already prohibited.
  • The amended policy states that an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
    • This implies that the scope of the above-mentioned additional provision has been expanded to all our neighbors (including China). The government has refrained from explicitly mentioning China.
  • Additionally, the amendment also states that the transfer of ownership of an existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restrictions imposed by the above rule will also require government approval.
    • The guideline was created to check multi-layered transactions which traced the beneficial ownership to the seven land border sharing countries.
    • This implies that private equity investors and venture capital funds that have investments from China (or any other land border sharing country) will also need prior approval before they make any investment, even ones that have already been pledged.

Concerns associated with these investments

  • China’s State-owned enterprises (SOEs), provincial governments were source of around 50% Chinese investments in India. These have become an important tool in China’s diplomacy. Also, it is difficult to differentiate between private sector and SOEs as many times they are indirectly related.
  • These investments (including the private sector investments) are part of China’s “Made in China 2025” plan. This plan is aimed at acquisition of technology. This is evident through investments in Indian technology startups like Paytm by tech giants like Alibaba.
  • India’s investment scrutiny mechanism may not be as robust as in developed countries. For instance, as of September 2019, the US, Australia, and Japan were among countries that have blocked Huawei, a private sector giant with close state ties, from their 5G plans. India has not taken a final call, although it has allowed Huawei to participate in initial 5G trials.
  • Increasing investment in sensitive sectors such as news services, fin-tech services etc. can be detrimental in the context of privacy of user data and data security. For ex. Byte Dance, which plays key role in censorship in China, has invested $25 million in Indian news aggregator Daily hunt.

Challenges in implementation of the policy

  • Impact on funding for start-ups: Funding for unicorns, smaller start-ups may be hit as several investors may get discouraged if asked to go through government route.
    • For example, upcoming funding rounds of India’s top start-up unicorns including Paytm, Zomato, Big Basket and Dream11 may get dampened.
  • More clarity needed: Further clarification is required on the reporting mechanism and identification of beneficial ownership structures such as the percentage of holding to ensure full compliance.
  • China alleges flouting of norms: China states that the barriers created by the policy for investors from specific countries violate WTO’s principle of non-discrimination. o India’s stand: India has categorically denied China’s allegations regarding its FDI policy.
  • India has given following reasoning-
    • The revised policy neither restricts market access nor national treatment— the two tenets of global trade-—and is thus not violative of any rules of the WTO.
    • On the investment front, the measure does not fall within the Illustrative List of the Agreement on Trade-Related Investment Measures (TRIMS), which details the measures that are inconsistent with the obligation of national treatment.
  • Spill over on neighborhood relations: Expansion of restrictions to all land border sharing countries may indirectly affect the FDI from countries such as Myanmar.

Way forward

  • Chinese investment in India has the potential to rebalance an extremely lopsided trading relationship. Although Chinese stakes are increasing in Indian companies, India has also emerged among the key overseas markets for several Chinese companies which can be better leveraged by India’s trade strategy to balance the trading relationship or secure market access for Indian firms in China.
  • In the light of this, there is a need to strike a better balance between creating a friendly, open and predictable investment environment on one hand, and safeguarding longer-term considerations of security and privacy on the other.
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