How do FDIs work?
FDIs or Foreign Direct Investments are the investments that international companies make in Indian companies. There are multiple ways to invest in a company, but the most common is through buying stake (equity/shares) in the home company.
The Government of India has established two routes of such investments in Indian firms, namely Automatic and Government routes. The automatic route (which is of interest right now) enables FDIs in companies without any prior government scrutiny in any industry (unless restricted under a predetermined list). The relevant authorities do need to be intimated about the same regardless.
What changed?
Pursuant to the new norms declared by the Government of India, all new FDIs from countries sharing land borders with India will have to follow the Government route of investment. This route requires intimation to and approval from the Government of India. It is important to note that this mandate was in place for Pakistan and Bangladesh hitherto.
Why do it?
Chinese firms already have immense investments and equity stake in major Indian firms like Ola, BYJUs, PayTM, Zomato, Dream 11 and many more.
With the coronavirus pandemic affecting the Indian economy and worsening the existing slump (debatable), the rigorous lockdown has severely hit valuations of many Indian start-ups and small businesses. The move is seen as an attempt to ward off the threat of "opportunistic" Chinese takeover of Indian companies who are facing a serious cash crunch.
More on it
The move coincides with similar barriers erected by other countries like Germany, Italy, Spain and Australia to block predatory lending. Additionally, while not overtly stated, the policy change is likely in view of risks to the national interests in a scenario where viable Indian businesses would be sold to foreign Chinese interests.
This is significant from a security perspective as many Indian companies have ties to the defense, healthcare and crucial government sectors which are the heart of the Indian democracy.
One may ask that if preventing Chinese takeover was the aim, why restrict investments from other countries and regions like Hong Kong as well? It is public knowledge that the People’s Republic of China has strategic investments in all the neighbouring countries. This also translates to having controlling stake in many of the firms in those countries. The money could therefore be routed through any such country and shell corporation to India. Hence , a Government route FDI will enable the Ministry to scrutinise such investments and safeguard the interests of domestic firms and national security.