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Chinese govt’s overseas investment guidelines may affect inbound M&As in India

31 August, 2017

In what could potentially stem the flow of increasing Chinese foreign direct investment (FDI) into India, Beijing now wants its companies to invest only in those foreign projects that align with its national interests.

In an advisory issued on 18 August, the Chinese government has asked businesses to invest into such areas that are aligned with its “One Belt One Road (OBOR)” policy, through which, it is looking to build a new Silk Road, which will connect Asia, Africa and Europe.

Moreover, it restricts Chinese companies from investing into real estate, hotels, sports, cinema and entertainment sectors in foreign countries.

This advisory comes at a time when Chinese investments into India have witnessed a surge and when real estate developers like the Dalian Wanda Group reportedly want to pump as much as $10 billion into the country.

The restrictions placed on sectors such as real estate and entertainment, could further impact proposed investments by the Wanda Group, which has reportedly been eyeing a controlling stake in Ajay Bijli-promoted multiplex cinema chain, PVR Cinemas. If this deal does go through, it could see private equity firms like Renuka Ramnath-promoted Multiples Alternate Asset Management and Singapore based L Capital Asia, cash out, apart from Bijli himself.

Apart from this, at least one Chinese pharma company, Shanghai Fosun Pharmaceutical (Group) Co Ltd is awaiting the Indian government’s approval to acquire an 86% stake in the KKR-backed, Hyderabad-based Gland Pharma, for $1.26 billion. However, the deal has been on tenterhooks.

Besides, Country Garden Holdings Co. Ltd, one of China’s largest property developers, is in an advanced stage of discussions with two Bengaluru-based developers—Unishire Group and Jain Heights—to buy land parcels for residential projects.

The Beijing-based Asian Infrastructure Investment Bank, a multilateral bank that supports infrastructure projects across the Asia-Pacific region, is also reportedly mulling pumping $1.5 billion into at least six infrastructure projects in India. Although the AIIB is a multilateral institution with 56 member states, it is chiefly promoted by China. It is, however, unclear how the Chinese government’s advisory might impact AIIB’s proposed investments, directly or indirectly.

Along with a restricted list, the advisory also lists a bunch of sectors, into which the government has prohibited outbound investments. These include core military technologies and sectors such as gambling, among others.

Though not specific to India, the Chinese government advisory comes just days before Prime Minister Narendra Modi is set to visit Beijing.

Analysts, however, say that while the regulations are specific to industries and not geographies, security and geopolitical considerations might play a central role while allowing companies to invest in countries like India.

“The regulations don’t say anything about that (the China-India situation), but the regulators might take that into consideration, when they are looking at it, but we have not experienced any situation where regulators have treated India as a country of any sensitivity—politically or otherwise,” says David M Blumental, Hong Kong-based partner at global law firm Latham & Watkins. “Having said that, in the context of an investment in the border region or an industry that touches on the military or other sensitive technology that might have military use, there may be some impact,” he says.

The advisory, issued jointly by four government arms—the Chinese National Development and Reform Commission, the People’s Bank of China and the commerce and foreign ministries—is essentially a series of guidelines, which classify outbound investments into three groups. These three groups fall under ‘encouraged,’ ‘restricted’ and ‘prohibited’ transactions.

The advisory says that all infrastructure projects that either align with OBOR or facilitate the deployment of Chinese industrial capacity or hi-tech equipment, will be encouraged. Moreover, the Chinese government will support its companies setting up overseas research and development centres and advanced manufacturing enterprises and investing into sectors such as oil and gas, mineral and energy, agriculture, forestry, animal husbandry, etc.

The Chinese government’s insistence on investments being aligned to OBOR could further queer the pitch for India, as it is opposed to the initiative, which it sees as China’s attempt to further its political influence, especially in sensitive regions like Kashmir, which are disputed. India had even boycotted a summit on OBOR in May.

Recently, the two countries ended a military standoff that lasted for more than two months in the Doklam region near India’s northeast border.

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Chinese govt’s overseas investment guidelines may affect inbound M&As in India

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