Why Does India Have One Wary Eye On Investments From China?

As the ongoing coronavirus pandemic roil stock markets around the world, including in India, New Delhi is out to protect Indian companies from foreign takeovers—especially from one neighbor with deep pockets: China.

On April 18, the Indian government amended its foreign direct investment policy, adding the crucial rider that investments from countries that share a border with India will henceforth need government approval, in a move widely considered to be an effort to rein in any potential takeovers from China.

The amendment came on the heels of the news that the People’s Bank of China had acquired just over 1% in Indian mortgage firm HDFC Ltd. The company’s stock fell more than 30% between January to March this year, the period when the investment was made. During the same period, the Sensex, the free-float, market-weighted stock market index of 30 well-established companies, similarly fell over 30%.

HDFC’s vice chairman and chief executive Keki Mistry told online portal Moneycontrol that the People’s Bank of China was an existing shareholder and owned 0.8% in the company as of March 2019. The news became public since it had hiked its stake beyond the 1% regulatory threshold and was required by the markets regulator to name the investor in its list of top shareholders.

Chinese investments in India are a touchy topic. New Delhi and Beijing are old foes—India has lost one war to its eastern neighbor, which is also a political and military ally to rival Pakistan—and the two continue to wrestle for dominance in the subcontinent.

While there are no comprehensive statistics on the net Chinese investment in India—predominantly because many of these investments are routed through subsidiaries in other countries such as Singapore—some estimates range between $8 billion (as per the Chinese embassy in India) to $26 billion, according to a March report by think tank Brookings India.

Chinese investments in India are not in large infrastructure projects, as would be expected, but rather in India’s rising startups, which require more cash than is available locally in the early years of building their business.

In fact, 18 of the 30 Indian unicorns—start-ups that have a valuation of $1 billion or more—have a Chinese investor, according to Gateway House, a Mumbai think tank. Investors such as Alibaba Group (founded by billionaire Jack Ma) and Tencent Holdings (cofounded by billionaire Ma Huateng) have invested in a range of fast-growing companies, including hotel aggregator Oyo, ride-hailing service Ola, logistics firm Delhivery, education app Byju and online food ordering and delivery platforms Swiggy and its rival Zomato as well as payments app Paytm.

The problem here, says Gateway House in a report, is that such investments tie India closer to China, especially as consumers increasingly use these apps and services. In the process, India risks losing control over data of its users as well as falling prey to propaganda by Chinese firms even as Indian companies get sucked into Chinese ecosystems where all companies are required to follow standards and protocols prescribed by the Chinese, the report says.

Santosh Pai, partner at Link Legal India Law Services and handles his firm’s more than 200 Chinese clients, says “this is a very tense time” for his clients and “sentiments are hurt.” But in the long run because of this “maybe the bottom feeders will leave India, and in one way that’s a good thing.”

But, he points out, if the amendment to the FDI policy was driven by a government concern for user data, it needs to take steps to protect that data from all companies. “By keeping Chinese money out you can’t tackle the data problem,” he says.

Amit Bhandari, lead author of the Gateway House report, disagrees. The problem with Chinese money, he says, is that in mainland China the lines between the private companies and the state-owned companies are “blurred.” The concern is if a Chinese company is more an arm of the state than a Google or a Facebook which operate under an oversight and that doesn’t exist in China,” he says.

In either case, India needs to balance its need for foreign money with its security needs, experts say. While it was in India’s interests to create “a friendly, open and predictable investment environment, the government will also need to more proactively safeguard longer-term considerations of security and privacy as it opens the door to new sources of investment,” warned Brookings in its report.

The Chinese are, obviously, not happy with the new amendment.

“The additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment,” the Chinese embassy in India said in a statement, adding that it hoped India would revise its “discriminatory practices.”

It’s not clear yet if the government’s move is meant only to prevent any predatory acquisitions in a flailing stock market, or if it’s a deeper effort by New Delhi to prevent China from getting control of Indian consumers. Something to be watched out for.