India opens the door of FDI for China

SYNOPSIS

India is one of the world’s fastest-growing economies, but why did it reconnect again with one of its biggest investors China after six years? What could be the reason? Let’s go back to the start to understand how economics, geopolitics, and strategic necessity brought the two countries back to the table.

India banned Chinese investments, fought a border war, and called it a national security threat. So why is it now welcoming Chinese money back?

Until 2020, countries that shared a land border with India were allowed to enter India freely without prior government approval. Chinese investors were active participants in India’s startups, especially in sectors like e-commerce, fintech, logistics and consumer internet platforms. Chinese tech investors had put an estimated $4 billion into Indian startups. It was found that 92 Indian startups had Chinese backing and 18 of India’s 30 unicorns at that time had Chinese investors.

But 2020 changed everything.

On 17^th April 2020, the Indian Government introduced Press Note 3 – a new rule that stated, “if your country shares a land-border with India, you now need the government’s permission before investing here.” The policy was introduced to safeguard the Indian firms from possible foreign takeovers. Even though the rule was applied to all neighbouring countries, it was widely understood that Chinese investments were the primary target. Then, on the night of 15^th June,2020, the border tension between India and China stopped being an economic issue; it became a national security concern. The Galwan Valley clash in Eastern Ladakh led to the most violent confrontation in decades. The clash claimed the lives of soldiers from both sides.

The impact was rapid. Chinese investment proposals were delayed, showing no clear timeline for approval, the venture capital funding into Indian startups slowed and manufacturing projects involving Chinese technology faced uncertainty.

But, if India applied these policies, what made it change its mind? The answer was simple. Indian factories making phones, electric vehicles, and solar panels still needed Chinese technology and money to function. Moreover, blocking Chinese investments also slowed many global funds with Chinese backing. Over time, India realised that blocking China was limiting its own economic growth more than protecting its interests. So, six years later, India started easing its grip on the Chinese investment on its own terms.

India introduced three broad changes in the FDI rules for China:

·  Chinese and other land-border investors can now invest up to 10% in Indian companies without government approval, but they cannot control the company. No board seat, no decision-making power, no management control.

 · Any investor from land bordering country will get implied by the automatic rule if they hold less than 10% stake and no controlling interest. The ownership gets determined at the investor level with accordance to India's Prevention of Money Laundering Rules, 2005.

· For priority sectors like manufacturing, polysilicon, capital goods, and electronic components, investment proposals must now be approved within 60 days, ending the era of applications left pending indefinitely.

India's decision to ease FDI restrictions on China is not completely open. India is clear with its position that Chinese investments are welcome, but the control is not. The rules have changed, but India’s caution hasn’t.

Anshi Faria