Chinese investment flows via hybrid route under lens

New Delhi: The government is reviewing the norms for use of some of the hybrid instruments for overseas investors after it came across instances of some Chinese companies seeking to circumvent rules around foreign direct investment (FDI) in Indian entities.

In 2020, after the Covid outbreak — when China’s role in the spread of the virus was under lens — the government had decided to end automatic approval mechanism for countries that have a land border with India. The move hit Chinese investors as all fresh investments need to be cleared by the government.

While the trigger was an investment by Chinese funding giant Tencent in a social media company earlier this year, with funds routed via Europe, some of the companies, such as Chinese conglomerate Fosun, which have investments in the country, are also considering pumping in money using this route. To go around the problem of scrutiny, especially after the border tensions in Ladakh, some of the Chinese companies are looking at instruments such as optionally convertible redeemable preference shares or other optionally convertible instruments to provide funding as these are considered to be debt instruments. A corporate lawyer said that there are instances where the Chinese investors are seeking rights enjoyed by shareholders, while providing debt.

These investors, based on advice from local legal outfits, are avoiding compulsorily convertible instruments as they are classified as equity by the RBI. As a result, the government has now begun discussions to see if the optionally convertible instruments can face greater checks. “We are looking at multiple options to ensure that there is no misuse of provisions by anyone. Discussions are under way but no decision has been taken,” a government source told TOI.

Another source said that while optionally convertible instruments were classified as debt at the time of maturity, something that is provided in the contract, the investor will have to seek government permission. “It is not as if they will invest and it will remain unnoticed, but there is a need to clamp down on it at the earliest,” the official source argued. In the past, large investments have flowed into the technology and new economy space but there is Chinese equity in real estate and pharma sectors, which have been hit by the curbs.

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