Effect on FDI Reforms due to COVID-19

What is the reform?

Ministry of commerce has recently made amendment in FDI policy of investment with land border sharing countries. Accordingly the referred countries have to take prior permission for making any type of investment in the country. This policy change disregards any differences between Greenfield investments or Brownfield investments, listed or unlisted companies, industry players and venture capital funds.

Why the reform has been made?

These changes are primarily aimed at China as for the being other neighbours are not the key investors while Pakistan and Bangladesh already have such restrictions. As the earlier economic slowdown and running COVID- 19 has augmented the losses of many unlisted or private ventures across the nation, thus making them tempting and cheap targets for giant Chinese companies. As on April 12, 2020 1% share of HDFC bank has been acquired by the People’s bank of China.  With these ventures more prone to takeovers and acquisitions the government initiated the step to restrict the chain as most investments flow through the automatic route in the country.

Consequences

With China being the prominent investor since 2014, this will certainly impact the Greenfield investment (where the finance country sets up the factories and provide employment to the natives). China has already regarded it as a violence of WTO principles elaborating about the free and fair trade across the world. This new move of department will not solely impact the new infusions but the existing equity investments also. Undoubtedly it is the fear of Chinese domination i.e., haunting over the world as it has already started production while the rest of the world is struggling over their economies.

Conclusion

Thus the sitting financial vulnerability of private companies and threat of opportunistic Chinese takeovers of Indian companies has forced the government to impose a blanket ban on automatic route investments during this pandemic mode.