New rules issued for foreign investments from neighbouring countries

India has made it mandatory for foreign direct investments from countries with which it shares a land border to require prior government approval, reported Reuters.

The government says that the aim is to deter "opportunistic" takeovers and acquisitions during the COVID-19 pandemic, but provides few other details. 

The new rule, passed on 18 April, is seen as targeted against China although the latter was not mentioned in the directive. It will also apply to Hong Kong, two senior government sources told Reuters yesterday.

The move followed the increase made by China's central bank, PBOC, of its stake in Housing Development Finance Corporation (HDFC) to a little over 1%.

The new rule is welcomed in India as a safeguard against foreign acquisitions in the country, particularly as valuations have weakened as a consequence of the pandemic. There are also calls on the government to tighten investments via the portfolio investment route. Through this route, foreign investors can buy stakes in any listed company but there is a ceiling of 10% per investor.

The capital market regulator, Securities and Exchange Board of India, is also intensifying its scrutiny of foreign portfolio investments from Asian countries in the face of fears that Chinese investors could be investing in India's blue-chip stocks at cheap valuations through indirect routes.