In today's newsletter, we talk about China, tech investments, and a new change in FDI policy.


The Story

Before we get to the heart of the story, a brief on hostile takeovers.

So, if you are a company that’s trying to acquire another company by offering shareholders exorbitant sums of money even whilst the board and the company management actively resist your offer. Then you are engaging in what most people like to “shithousery”.

Or as other people like to call it — a hostile take over.

Consider, for instance, what happened to the German industrial robotics supplier Kuka. At the time (in 2016), the company’s stock price was trading at around $80 and there were talks about a Chinese Appliance Giant wanting to corner over 90% of the company in a bid to seize control.

Interesting news item, but now exactly mind-blowing stuff.

However when the same appliance manufacturer came back with a multi-billion dollar offer and was willing to pay a premium — nearly 60% on the share price, everybody sort of looked at each other and went — “Wow!!!”

Why on earth is a company that’s known to sell washing machines and air conditioners, so eager to take over a sophisticated german engineering behemoth, right?

In fact, the bid was so audacious that it almost prompted a national level inquiry after many feared that Germany was practically giving away high-tech know-how to China.

The matter only died down after Kuka’s then CEO came out publicly to allay concerns about this being a hostile takeover.

He said and we quote — “Kuka will remain German. The management will remain independent and the board will continue to pursue its strategy. We do not see this as being hostile in any way”

Unfortunately, 2 years later, the CEO was unceremoniously ousted from the company and his contract — prematurely terminated


The point here is this. Ever since the Kuka deal, lawmakers across Germany and other countries have been actively debating about the kind of influence Chinese companies wield when they make these kinds of investments.

Sure, they offer much-needed capital. Perhaps, they’ll even bail out a company and it’s always great for bilateral relationships, but where does one draw the line. I mean, when do you intervene and say — “You’re not taking over that company. Not today.” Especially when you can’t tell if the private Chinese entity is acting on behalf of the state machinery aka the communist party of China.

Here’s an excerpt from a Brookings India policy paper driving home the point rather succinctly

While the Chinese private sector’s abiding objectives, as in any country, are maximising profits and answering to shareholders, it is to be noted that its roles and responsibilities to further the goals of the Communist Party at home are clearly laid out in policy.

These responsibilities have only been made clearer by the Xi Jinping government. For instance, an official policy paper released in March 2019 called on the high-tech and newly-emerging industrial sectors to “fully implement and fulfill” the spirit of the 19th Party Congress and Xi Jinping’s vision.

The party has co-opted tech CEOs by appointing them to either the National People’s Congress (legislature) or the Chinese People’s Political Consultative Conference (a politically advisory body, or upper house), including Xiaomi’s founder and CEO Lei Jun and Baidu’s founder Robin Li.

And the likes of Xiaomi, Tencent, and Alibaba have been making some big investments in India. In fact, 18 of the 30 Indian unicorns (startups worth over $1Bn) have Chinese investors on board. We are talking about Flipkart, PayTM, Delhivery, Ola — all of ‘em.

Now don't get us wrong. We are not saying that these investments are suspect, to begin with. In fact, we’ve been able to grow the startup ecosystem partly in thanks to these tech investments. But you have to bear in mind that when a Chinese entity is an active participant in the deal-making, there’s always going to be concerns about data protection, privacy, censorship, etc.

And so, policymakers have been trying to figure out how we could limit Chinese influence with some kind of government intervention if the need were to arise.

Unfortunately, the scope for such intervention was largely limited because our FDI policy (the policy which dictates who can invest how much in Indian companies) explicitly allows most foreign investments unless you are trying to tap into sectors like Defence, Atomic energy, Railways, etc. However, with Coronavirus and business interruptions now becoming a mainstay, there were calls for the government to expand the scope for exceptions. Especially, after news stories emerged detailing how Chinese entities were trying to take over cash strapped SMEs (Small and Medium Enterprises) at throwaway prices.

The government simply could not let that happen.

So on Friday, they made a subtle change to an existing provision in the FDI policy to keep China at bay.

“A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route”

Meaning if you share a land border with us (China does) and you (or your Indian subsidiary) wants to invest in an Indian company, you now have to have explicit approval from the government.

Matter Close…

Story Done…

We will see you tomorrow.

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