The story so far: China’s largest sport utility vehicle (SUV) manufacturer Great Wall Motor Company Ltd., which had announced its entry into the Indian market in 2020 with an investment of $1 billion, has pulled out of the country and laid off all employees at its operations after failing to obtain Foreign Direct Investment approvals.
This came after American automaker General Motors said on Friday, July 1, that it had called off the sale of a shuttered Indian manufacturing plant to Great Wall Motor after they failed to obtain regulatory approvals from the Indian government.
What led to the exit of China’s Great Wall Motor Co. Ltd?
At the biennial India Auto Show in February 2020, Great Wall Motor (GWM) had announced with much fanfare its plan to enter India, pledging $1-billion in investment. India was a key market for the carmaker’s plan for global expansion and the plant, had it opened, would have been Great Wall’s biggest manufacturing plant outside China.
In June 2020, after striking a deal with General Motors (GM) to buy its shuttered 300-acre manufacturing plant in Maharashtra’s Talegaon for $300 million, GWM signed an MoU with the Maharashtra government reaffirming its commitment to invest $1 billion in phases.
GWM had said that the manufacturing facility and its Research and Development centre in Bengaluru would generate employment for over 3,000 people in a phased manner. The company, which sold 1.1 million cars in 2020, most of them in China, was expected to begin selling its India-made Haval SUVs in the market in 2021.
As GWM started hiring staff to execute its entry plan, India introduced new Foreign Direct Investment (FDI) rules in April 2020, increasing scrutiny of investments from countries which share a land border with it, to deter opportunistic takeovers during the COVID-19 pandemic.
These countries included China and the tweaking of FDI rules was followed by the Galwan Valley standoff with Chinese troops in May that year, after which the Centre cracked down on firms with Chinese links and banned over 250 Chinese apps.
Further, in October 2020, an FDI Proposal Review Committee headed by the Union Home Secretary and Secretary DIPP as a member was constituted for intensive assessment of security clearances for Chinese FDI proposals.
Against this backdrop, GWM in August 2021 decided to take a portion from its $1-billion planned investment in India, which could range up to $300 million, and re-allocate it to Brazil.
ByAugust last year, around 150 investment proposals from Chinese investors — worth more than $2 billion — had been held up, according to a Reuters report.
After waiting for nearly a year more and failing tosecure approval to invest and buy the GM plant in Maharashtra, GWM decided to exit India.
What are the new FDI rules introduced in 2020?
The Department for Promotion of Industry and Internal Trade (DPIIT) in April 2020 made prior government approval mandatory for foreign direct investments from countries which share a land border with India.
Before this, only investments from Pakistan and Bangladesh faced such restrictions. Afghanistan, Nepal, Bhutan, and Myanmar do not have major investments in India. The move was thus seen as restricting Chinese investments in the country. The move also came after reports of an incremental purchase of shares in HDFC by the People’s Bank of China.
The Centre had said that the revised FDI policy was aimed at “curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic,” since many Indian businesses ground to a halt due to the lockdown and valuations plummeted.
The revised rules, contained in Press Note 3 (PN3) of the DPIIT on FDI policy, said that a non-resident entity could invest in India, subject to the FDI Policy except in those sectors/activities in which FDI is prohibited such as atomic energy and gambling.
However, if such a non-resident entity was from a country sharing a land border with India or where the “beneficial owner of an investment into India” was situated in or was a citizen of such a country, the investment could only be made through the “government route” meaning through a highly scrutinised approval process.
The official statement added that a transfer of ownership of any existing or future FDI in an Indian entity to those in the restricted countries would also need government approval. The rules said that any further sale of FDI to investors in neighbouring countries would also have to comply with the new policy, with each subsequent change in ownership through transfer of investment to also requiring government approval.
Most other countries merely need to inform the RBI of any such transactions.
What have been the implications of the rules?
In March this year, the Ministry of Commerce and Industry informed the Lok Sabha that the government had received 347 investment proposals from neighbouring countries since April 2020, with value totalling Rs. 79,951 crore. Of these proposals, 66 had been approved while 193 had been rejected, closed, or withdrawn. The Ministry did not say anything about the status of the rest.
Of the proposals, seven were FDI proposals in the automobile sector, with a collective value of Rs. 79.61 crore.
Industry expert Santosh Pai wrote in The Hindu that the new rules may pose obstacles for Greenfield investments, Chinese investors bring fresh capital to establish new factories and generate employment in India. China has been the fastest-growing source of FDI since 2014. Mr. Pai contended that the positive sentiment generated among industry players in China since then may be punctured by the need for government approval.
Dharmendra Kumar, the former Chairman of the Competition Commission of India and a former Executive Director at the World Bank wrote in The Hindu BusinessLine that the changed circumstances post the revision of rules, particularly the geopolitical situation owing to the Russia-Ukraine war, had severely impacted the global economy and created potentially huge inflationary pressures. At such a time, India needed to update and rationalise the PN3 rules to boost legitimate investments, he said. He also called for greater transparency and expediency in the FDI approval process.
How did China react to the rules?
Chinese investments across sectors in India have been growing since 2014. However, infrastructure investments from China fell after India chose to not be a part of the Belt and Road initiative.
A Brookings India report from 2020 showed that net Chinese investment in India until 2014 stood at $1.6 billion, mostly coming from state-owned players in the infrastructure space. Three years later, total investment had increased five-fold to at least $8 billion according to Chinese government data, with a shift from a state-driven to market-driven approach. Brookings pegged the total current and planned Chinese investment in India to have crossed $26 billion in 2020.
However, the revised rules showed a considerable impact on Chinese FDI. In April-June 2020, FDI from China (counted from the year 2000) stood at ₹15,422 crore while in the first quarter of 2022 it has come down to ₹12,622 crore, according to Department for Promotion of Industry and Internal Trade (DPIIT) data.
When the April 2020 FDI rules were announced, China had asked India to avoid such “discriminatory practices” and have a standard approval metric for foreign investments from all countries. It said that the new rules violated the WTO’s non-discrimination principle.
Counsellor Ji Rong, spokesperson for the Chinese Embassy in India, said: “More importantly, they (new rules) do not conform to the consensus of the G20 leaders and Trade Ministers to realise a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.”
