India Proposes Scrutiny of New Portfolio Investors from China, Hong Kong

Posted by Written by Nishtha Yadav Reading Time: 3 minutes
  • India is planning stricter checks on foreign portfolio investors (FPIs) from China and Hong Kong as the government is concerned that FPIs may attempt to buy equities to gain control of local firms. Previously, India made changes to its FDI policy to prevent investors from its neighboring countries engineering hostile takeovers of local companies.
  • Some of the impositions may include a mandatory security clearance from the Ministry of Home Affairs and setting up a body to scrutinize new FPI registrants from these two regions.
  • Investor sentiment may get deeply impacted by this move, which comes at a time when the country needs foreign investment to steer its economic recovery after COVID-19.

As per media reports, India plans to impose stricter scrutiny of new foreign portfolio investors (FPIs) from China and Hong Kong. Just recently India revised its foreign direct investment (FDI) policy for bordering countries (in April), making it mandatory for seven countries, including China, to seek government approval before investing in any sector.

India amended its FDI policy to prevent any opportunistic acquisition of local firms as it was reported that China may be trying to acquire assets in key sectors in strategic markets due to economies struggling under the impact of COVID-19. The Indian government is now concerned that due to the FDI policy change, companies and investors from China “may ramp up their investment in India as portfolio investors, purchasing company securities such as equities to gain control.”

These concerns were raised when it came to light that China’s central bank, the People’s Bank of China (PBoC) increased its stake in HDFC, an Indian banking and financial service company, from 0.8 percent to over one percent – requiring a declaration by the Indian company to the stock exchanges.

Hong Kong has 111 FPIs registered in India, while China has at least 16 FPIs registered in India, including the Asian Infrastructure Bank (AIIB) and PBoC.

Additional checks that may be imposed

Though the government is yet to comment on additional checks for FPIs, it is being reported that India may create a separate body to scrutinize new FPI registrants from China and Hong Kong. Hong Kong is included in this list since substantial investments from China are routed from this special administrative region.

A security clearance from the Ministry of Home Affairs for new FPI registrants from these two nations may also be mandated by the Indian government. Further, FPIs may undergo stringent know your customer (KYC) norms at the time of registration.

However, it is not yet clear if existing FPIs from these two jurisdictions will have to go through additional scrutiny, or if these impositions will be extended to FPIs from other countries.

How to read the FPI scrutiny

It is important to understand the differentiation between FDI and FPI. While FDI is considered as a long term, more stable source of funding, FPIs essentially invest in listed shares and other securities that are easy to liquidate and exit.

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If a political or an economic issue engulfs a nation, FPIs often exit that particular foreign market as their investments become riskier by the day. This is becoming a key concern for businesses in India who may struggle with capital / equity issues if the government toughens up against FPIs from China and Hong Kong.

Meanwhile, FPIs have already begun to pull out of Indian equities. In March 2020, FPIs in India sold net assets worth US$8.4 billion.

There is a concern that the regulatory instability could impact future investment at a time when India is leaving no stone unturned to attract foreign firms looking to exit China. Yet, this assessment needs to be more nuanced as India’s position on its neighbors is influenced by immediate political and security factors. That will not affect India’s position on attracting investment from other countries, be it in the form of FDI or FPI.

Impact on investment from China

While investment from China is not likely to stop pouring into India, experts believe that this move may deeply impact future investor sentiment. The extra monitoring could potentially hit capital inflows from China and Hong Kong and / or delay investment plans in India. Yet, multiple countries and regions around the world, such as the EU, have recently increased their monitoring of Chinese investments for economic and security concerns, and these have not dissuaded continued investor interest into their economies.

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However, many feel that at a time when India, like the rest of the world, is experiencing economic instability, any slowdown in investment may have an outsize impact.

For instance, leading Chinese investors, such as Alibaba, Tencent, and Ant Financial have heavily invested in India’s start-ups and home-grown unicorns. Chinese investments are also a part of India’s technology and automobile sector. Therefore, this slowdown may impact liquidity in Indian companies, in turn negatively impacting the Indian economy.

Analysts and market watchers will be looking to see whether India clarifies it’s thinking behind this move – that it is about protecting Indian firms, and not about stopping investments from China and Hong Kong. Further, the government should ensure that despite the additional clearance, non-problematic investments are cleared as soon as possible. Here future investors will expect a clear and transparent regulatory mechanism – in the absence of which, India will lose its appeal in the region.

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India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.