On the outset of the increase in alertness and restrictions imposed against Chinese investments in India, the Indian Council of Investors (ICI), an investor association group, suggested to the Ministry of Finance to initiate a strong approval-based regime for both FDI and Foreign Portfolio Investment (FPI) rules, where the investment crosses a certain threshold. Moreover, the recent situation, where of China’s central bank showed its interest in Housing Development Finance Corporation (HDFC), raised several concerns which were critical since the plunge in HDFC’s share price which was essentially caused due to the Coronavirus- led hold up in the economy.

On April 11, 2020 People’s Bank of China (PBC) raised its stake of ownership in HDFC Bank to 1.01 percent from 0.8 percent. Various media reports also cited that Ministry of Finance was ruffled as market regulator; SEBI had not raised red flags when PBC was buying shares in HDFC. No law currently restricts central banks of other countries from investing in Indian commercial entities. However, this move by PBC is unusual considering that central banks typically buy bonds of companies in other countries, and not equities. Investments by Chinese companies and institutions have attracted widespread scrutiny from all over the world since the beginning of this pandemic. As COVID-19 continues to threaten lives and livelihoods across the globe, businesses and their assets are not reflecting their true value, thereby becoming attractive targets for hostile takeovers and acquisitions.

In light of this, Rule 3.1.1 of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 was amended.  The new amendment in question requires certain investments from countries outside India as FDI to come through the government approval route alone, and not under the direct route of investment. Wherein, with the new amendment, FDI in these cases would require an approval from the Government of India, which would mean that the government would be able to monitor the extent of these investments and give its approval, should it choose to do so. The initiative by the Government is to block direct investments from mainly China; these Chinese companies may buy assets at lower valuations and act for serving their personal agenda. Therefore, this paper aims to critically analyse the amendment and tries to establish whether such amendment is needful in the longevity and smooth functioning of India’s national security.

Keywords: Foreign Direct Investment (FDI), market regulator, Foreign Portfolio Investment (FPI) rules, Foreign Exchange Management (Non-debt Instruments) Rules

DOI: http://doi.one/10.1732/IJLMH.25196