After FDI Curbs, India Plans Stricter Check on FPIs from China and HK

India is considering additional checks on foreign portfolio investments from China and Hong Kong after making prior government clearance mandatory for any foreign direct investment (FDI) from seven countries it shares land borders with, including China.

The finance ministry is in talks with the commerce and industry ministry, Sebi and RBI on the proposed framework after concerns about such inflows were raised when China's central bank increased its stake in Housing Development Finance Corp (HDFC). The People’s Bank of China had raised it to more than 1% from about 0.8%, requiring a declaration by the Indian mortgage lender to stock exchanges.

“The Department of Economic Affairs is working on the FPI issue. It is not finalised yet,” a government official said.

FPIs from China and Hong Kong may have to undergo more stringent know your customer (KYC) norms at the time of registration and separate mechanisms could be put in place to ensure prior regulatory or government clearance for investments in listed entities.

Collection of details underway

A dedicated cell could be set up to scrutinise new FPI registrations from these countries and their investments.

“The government and market regulator have already begun collecting details on Chinese investments and ultimate beneficial owners of FPIs based in China through Sebi, and this additional data gathering is aimed to create barriers for Chinese investors,” said an expert on foreign investment. “Chinese funds have begun slowing their investments in India and are in wait-and-watch mode.”

Compared to FDI, which is a more long-term and stable source of funding, FPI is considered hot money invested in listed shares that’s easier to liquidate and exit.

India’s move comes at a time when the US has begun a crackdown on Chinese companies listed on American bourses and a Bill to delist them is already under Washington’s consideration.

The fear is that Chinese companies may acquire stakes in strategically important companies at a time when stock prices are volatile.

Beneficial ownership in focus

The finance ministry and the Department for Promotion of Industry and Internal Trade (DPIIT) are also working on defining the beneficial ownership threshold beyond which prior clearance will be necessary. This is crucial for FPIs as they receive pooled investments from multiple entities. A clarification on the issue is likely soon, the official said.

Asked about beneficial ownership, Finance Minister Nirmala Sitharaman said in an interview earlier this week that “We have responded somewhat to make sure that Indian industries are safeguarded, particularly looking at our border. And in the process if there are questions being asked, we are ready to clarify.”