A sign advertising the mobile-phone payment system Paytm at a roadside stall in Mumbai. Photo: AFP

With a coronavirus-induced slowdown weakening balance sheets, any move by Chinese firms to increase their stake in Indian firms arouses suspicion. When the People’s Bank of China recently increased its stake in India’s largest non-banking mortgage firm, Housing Development Finance Corporation, from 0.8% to 1.01%, it triggered widespread alarm. The Indian government was accused of not doing enough to stall the move.

The mortgage lender justified its conduct by stating that under the existing rules a disclosure needs to be made if the foreign entity picks up more than a 1% stake. The share purchase by the Chinese bank happened between January and March and the timing had sparked fears of a hostile takeover as the mortgage company’s shares were falling rapidly due to the economic disruption caused by the pandemic.

A rattled Indian government last Saturday revised its foreign investment policy. As per the new norms, all investments from neighbouring countries will now require government approval. The rule is meant for all neighbouring countries, but it is specifically aimed at China, with which Indian companies have high levels of commercial engagement.

This has upset China, which said the “additional barrier” imposed by the Indian authorities violates the World Trade Organization’s principle of non-discrimination and is against the norms of liberal trade.

The new rule will also be applicable to indirect investments. If an Indian company gets funding from a non-Chinese foreign firm that is backed by a Chinese investor, it will require a government stamp of approval.

Trade observers say the Indian government’s move would result in funding delays for its top startups including Paytm, Zomato, BigBasket and Dream11. Chinese investors including Alibaba and Tencent have collectively invested US$3.9 billion in Indian startups in 2019. The country’s digital economy is powered by Chinese investors.

The move is expected to affect early-stage companies that are in talks with Chinese investors and also those looking for new investment rounds. Legal experts also point out that enforcing the notification will be impractical for the companies and that implementing them is next to impossible.

India’s move to change the foreign investment norm came after a large number of countries in Europe, including Spain, Italy and Germany, issued warnings about predatory investments by Beijing when their markets crashed following a rise in coronavirus cases and subsequent lockdowns.