The geopolitical focus these days is on the ‘decoupling’ or ‘de-risking’ between the U.S. and China. India, too, adopted its own set of policies to limit Chinese influence in its economy, based on geopolitical and economic considerations. These policies, however, have evolved as ad-hoc, last minute responses to changing geopolitical/economic circumstances and routinely suffer from a lack of public debate, absence of a structured policy-making process which is needed to take into account views of varied stakeholders, and therefore display critical gaps or nuances. As we show below, India has often appeared reactionary on this front, demonstrating the lack of a structured approach which balances national security with economic growth.
The cornerstone of India’s attempted decoupling with China is Press Note 3/2020 (PN3) to the foreign direct investment (FDI) policy, published under the aegis of India’s Ministry of Commerce in April 2020. PN3 restricted direct and indirect FDI from entities based in countries “sharing a land border” with India. Although it didn’t explicitly name China, the timing and focus of the policy made the target evident. PN3 mandated government approval for all investments coming from such countries, thereby effectively shutting the door on strategic Chinese investments due to the uncertainty and scrutiny involved in procuring these approvals.
However, it took until August 2023 for the government to move against passive financial investments by China in Indian listed companies. Foreign investors looking to make financial investments through relatively small stakes (less than 10%) in companies listed on Indian stock exchanges are required to obtain registration as a ‘foreign portfolio investor’ from Securities and Exchange Board of India (SEBI). Beginning in 2023, Foreign Portfolio Investments (FPIs) were required to disclose their ultimate beneficial ownership, making it difficult for entities with any significant Chinese holdings to obtain such registrations. While SEBI did not formally refuse registration to investors with ties to PN3-impacted jurisdictions, it is known to have significantly slowed down processing of applications from such investors and enhanced scrutiny of their applications.
