Brij Nath Betab
Nobel prize winner French virologist Professor Luc Montagnier may have joined the world to pin down China for being responsible for the spread of Covid -19, the communist party governed ‘Peoples Republic’ seems to be not only undeterred but still embolden enough to use the opportunity of world market’s melt down due the spread of this virus to further its expansionist agenda. Recently it took advantage of the fall and through a ‘large entity’ purchased one percent additional shares in an Indian housing finance company owned by an Indian business house. This additional investment alerted the Government and the concerned market agencies and acting promptly to control further purchase of shares the Government issued a notification making prior approval necessary for Foreign Direct Investment FDI in Indian companies.
China is already present in Indian market but raising the level of investment in distressed companies with the clandestine objective of ‘opportunistic takeover’ would have consequences for the business and ultimately the security of this country.
India’s second largest trading partner China is doing this despite its economy shrinking 6.8 percent in the first quarter of 2020 and despite having accepted to find a solution to the India’s concern that her trade deficit is continuously widening. Trade deficit was one of the major issues that were discussed in last October when Chinese President Xi Jinping visited India and held discussions with Prime Minister Narendra Modi. While India was expecting some solution to this, as both the countries had agreed to put in place a mechanism to deal with this issue, China clandestinely planned to play a trade trick to grab through open market purchase the shares of certain Indian companies that may face financial crunch due to Lockdown. Apparently the intent could have been to acquire control through purchase of majority shares.
Many foreign investors always have an appetite for cheap Indian company shares and they are always ready to take bottom fishing risk. This was evident when the Sensex gained about four thousand points during the last about two weeks. These bottom fishing investors included some Foreign Institutional Investors FII’s and Foreign Portfolio Investors FPI’s. This would have been good as investment in Indian companies is always considered a healthy sign of economy but for the hidden agenda of the Dragon.
Investing in each other’s countries and purchase of Company shares is almost well regulated and Indian investors also invest in foreign countries, china included, through purchase of company shares and other routes (Funding or participation in developmental projects etc). But the transactions have to be transparent.
India has always encouraged foreign investors to trade in Indian derivates and ‘to take a position in Indian market. It was with this aim that a Stock Exchange, SGX (Singapore Exchange) an investment holding company was established in Singapore in the year 1999. In common parleys this means that these investors are investing in Indian companies while sitting at Singapore as Singapore is a big business hub with low tax rate. Apart from this there is also ‘Mauritius route’ which some foreign investors prefer as Mauritius is considered a tax heaven. Investor categories have been recognized as Portfolio Investors, Foreign Institutional Investors, FIIs, Non Resident Indians, NRIs, Qualified Foreign Investors, QFIs, Foreign Venture Capital Investors, FVCIs, and so on. These categories of investors can invest in Indian companies, purchase mutual funds or even some Government securities, bills and commercial papers etc.
To make investments transparent, certain regulations are always needed to be followed as at times locating the original source of funding becomes difficult. Once the big problem was that an investor could create a subsidiary in Mauritius and invest in India through that route. This has been curbed to a great extent as this type of investment, where the original investor (Individual, Group of individuals, a Company or Country) is not known, has consequences for the country’s security.
The Government has also a FDI, Foreign Direct Investment Policy, where some investment is allowed under ‘automatic Route’, without prior approval the Government, subject to certain rules and regulations including tax rules and the Foreign exchange management Act.
After India opened its economy and opted for liberalized economic policies in early nineties, doing business did not become easy for Indian companies only but investment by NRIs and Foreign Investors too became easy. Foreign investment has helped develop Indian economy further and also in creating much needed job opportunities. Foreign investors keep an eagle’s eye on the economic scenario like the crash in stock market to accumulate cheap shares of Indian companies. Government and the regulator are always alive to this scenario hence rules and regulations are defined and in specific sectors investments by foreigners are halted at a specific limit. Sometimes this limit is revised to safeguard the interest of the industry or further the economic interest of the country.
In the present case the Government was alerted when the Indian company made disclosure regarding Chinese investment in a filing to the regulator as required under law. This rang the alarm bells in the concerned quarters and the Government did act promptly and issued a notification saying that all foreign direct investments in Indian companies need prior Government approval. The decision may need further clarification with regard to other types of investments ,but as we know the Chinese hegemonic intent, particularly in this region, the significance of the issue is that Government acted in time to stall any future ‘hostile takeover’ of Indian companies.
In case of China, the apprehension was that it would not only use its own resources and enter Indian companies under the direct route but would use Pakistani companies to invest in India on its behest by registering a company or a subsidiary there or any other neighbour of India. This is where Government has halted China, who could covertly try to become a majority share holder with the hidden agenda of hostile takeover. That could have implications not only for the security of the country but also for the business environment as owning majority shares can also impact the appointment of and influence the board of directors and subsequently the decision making process. It is here that all countries who share border with India have been included in the list. Pakistan being a poor country succumbed to Chinese tactics under the grab of CPEC, but thankfully India has a strong government that could take a bold decision as it has the will to safeguard not only the national interest but also the interest of Industrialists and businesses.
While investments from foreign investors need to be encouraged, a mere one or two percent share difference can change the future of a company. With timely action the alert government has pre-empted China’s clandestine market move. The decision may have ramifications for mutual investments with China and other countries as well but this was the need of the hour as many companies may need resources to tackle the Lockdown impact. One hopes that foreign investors under all categories would be netted to make the hostile takeovers by foreign investors impossible.
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