22 Apr 2020 17:15 IST

Is the fear about China’s hostile stake buys in Indian companies justified?

Quietly, investments across sectors, both by China’s companies and its sovereign wealth fund, are rising

Last week, the Government of India tweaked its foreign direct investment (FDI) policy and put a blanket ban on investments through the automatic route by entities from countries that share a border with India. While restrictions are already in place for FDI from Pakistan and Bangladesh, the new move is said to have been done with an eye on China (Nepal, Myanmar, Bhutan and Afghanistan are other countries that share their borders with India). This followed the market buzz that the Chinese government is trying to buy companies from across the world using the drop in valuations following the Covid-19-led market crash.

Last week, through an exchange announcement, HDFC, India’s largest mortgage lender, announced that People of Bank of China’s holding in the company went up to 1.75 crore shares — that works out to a holding of 1 per cent. According to market reports, the Bank already held a stake in the company and only increased it in March as the stock price fell by a sharp 25 per cent.

As of December 2019, no company in the listed space among those in the BSE-500 basket had a shareholding pattern with an over 1 per cent holding by a Chinese entity, However, in recent years, Chinese players have been buying stake in the unlisted space, across sectors including technology, construction and healthcare.

Investments into India

According to a report from Brookings India (“Following the Money: China Inc’s growing stake in India-China relations,” March 2020), the Middle Kingdom’s investments in India which, until 2014, were $1.6 billion, increased to $8 billion by 2017.

While that number is from the Chinese Ministry of Commerce, the original investment could be much bigger (at least 25 per cent more, by a conservative estimate), says the report, as it doesn’t take into account acquisition by Chinese companies in the technology sector. It also excludes investments from China routed through Singapore, Hong Kong or other third-party countries. For instance, the $504-million investment from Xiaomi would not figure in official statistics. If the announced projects and planned investments are included, the total current and planned investment could be over three times the current figure, crossing $26 billion, adds the report.

Presence across sectors

The Chinese Global Investment Tracker (the only public data set that covers China’s documented global investment), and includes data compiled by the American Enterprise Institute and the Heritage Foundation, shows that in the last five years, Indian tech start-ups, including One97, VMate, MakeMyTrip, Swiggy, Zomato, BigBasket, Flipkart and Paytm Mall, have attracted investments from Chinese investors, including such big names as Alibaba, Tencent (a multinational conglomerate that specialises in internet related services and entertainment) and Ctrip (China’s leading provider of packaged tours, transportation and , services).

The Brookings report says that Xiaomi, the Chinese mobile phone maker, has a large investment spread over 100 different start-ups including ShareChat, KrazyBee, ZestMoney, Mech Mocha Game Studios and Clip App. Large deals in other sectors in last 10-12 years include: investment in Gland Pharma by Fosun, a Chinese investment company of $1,080 million in 2017; investment by Minmetals and Xinxing Iron of $1200 million in 2008 in Kelachandra and Mansara Group — manufacturers of steel products; investment by Trina Solar in Welspun Energy in 2015; and investment by Tidfore Heavy Equipment in Uttam Galva Metallics in 2016.

According to the Brookings report, Chinese companies have escaped the kind of scrutiny in India that their investments have attracted in the West. This could be because of the ‘assumption that investments from the Chinese private sector are entirely different from state-led investments. The report argues that the separation between the Chinese state and private business is blurry.

Scouting for opportunities

China’s sovereign wealth funds and its other asset management companies have also been hunting for investment opportunities in India. The HDFC stake purchase by PBOC was on behalf of China’s Sovereign Wealth Fund, SAFE, and is one case that has come to light because the company is a listed enterprise and its holding crossed 1 per cent. There may be others too. CIFM (China International Fund Management) Asia Pacific Fund, a JV with JP Morgan Asset Management, also holds stakes in a few Indian companies including those in the infrastructure space as per market reports.