Is India singling out Chinese companies?

Mao Keji, an emerging India watcher in China, says India is suspicious of large, multinational, technology, and asset-light companies due to history & socio-political atmosphere.

The latest news about Chinese companies’ venture into India is New Delhi’s rejection of Chinese automaker BYD Co's proposal to set up a $1 billion factory in India in partnership with Hyderabad-based Megha Engineering and Infrastructure Ltd.

Before that, it was India asking Chinese companies to induct Indian equity partners and appoint Indian executives. And the Indian government raided the offices of Vivo, a Chinese smartphone maker, and froze $58.76 million. That was a familiar story since India had accused Xiaomi, another smartphone maker, of making suspicious remittance payments and seized funds worth more than $600 million, which an Indian High Court upheld.

The biggest Chinese victim so far appears to be TikTok, which lost 200 million users in 24 hours after India put in place sweeping bans on Chinese apps in 2020 after a deadly border clash that sank bilateral ties with no sign of recovery. Among “the problem with India’s app bans,” an Atlantic Council analysis found “government overreach with no transparency”, “a lack of due process for ban policies”, and “no data privacy regime means ‘anything goes’”.

It’s therefore not difficult to see why there are rocketing suspicions in China towards doing business in India, despite Indian official data showing investments from China are slowly returning through new avenues and routes.

Indian diplomats have said the investigations are not exactly targeting Chinese companies, and India has an independent legal system where foreign investors can litigate their grievances against the government. (In a separate case, an Indian court quashed the government’s block of $447.65 million against Xiaomi.)

India indeed has a history of going after multinational corporations broadly, Mao Keji wrote recently in 环球 The Globe, a bi-weekly magazine under Xinhua News Agency.

Mao is a research associate at the International Cooperation Center of the National Development and Research Commission and an emerging India watcher in China. A Hindi speaker with master’s degrees from Tsinghua University and Johns Hopkins, Mao has written widely about India in Chinese media.

Mao argues that India is suspicious of multinational corporations, large companies, new technology ventures, and asset-light businesses, and its government and legislature have a history of colluding to hunt foreign investors retrospectively. With Indian hostility against China due to a territorial dispute that has unfortunately spilled blood, Chinese companies should think long and hard about the world’s most-populated, young, and emerging economy.

Below is a translation of the article published on July 26, 2023, rounding up U.S., European, Japanese, and South Korean investment failures in India, which is also China’s fellow member in BRICS and Shanghai Cooperation Organization.

印度老割外资“韭菜”，受伤的可不止中企

India Frequently 'Harvests' Foreign Businesses; Not Just Chinese Companies Have Been Hurt

In recent years, the Modi government has been suppressing Chinese smartphone companies that have invested and developed businesses in India, such as Xiaomi, Vivo, OPPO, Huawei, etc., on grounds of national security, tax evasion, and illegal remittances. Some Chinese companies have suffered heavy losses. The phrase "Earn in India, spend in India, not a penny to be taken home"(印度赚钱印度花，一分别想带回家) has become a popular saying in the Chinese online community.

The Indian business environment is shrouded in heavy fog, with many important questions still unanswered. Is the Modi government's treatment of Chinese companies a specific crackdown targeting China, or is it a common experience for foreign companies in India? What is the current state of the Indian business environment? Is it a place that foreign businesses avoid due to its risks, or is it a gold rush that everyone is eager to enter? How do the Indian government and society genuinely view foreign investment? Is it a sincere welcome or a hidden agenda to exploit foreign businesses? Since the Modi government aims to attract foreign investment to boost India’s economic growth, why does news of “foreign companies being mistreated and taken advantage of”  repeatedly keep emerging?

Answering these questions will not only help businesses develop more rational strategies in response to the Indian government’s tough economic policies but also contribute to a deeper understanding of our important neighbor - by unfolding its strengths while gaining insights into the shortcomings deeply embedded in India’s history and system.

Not just Chinese companies have been hurt

Since coming to power in 2014, the Modi government has witnessed a significant improvement in India’s ranking on the World Bank's Doing Business report, soaring from 142nd place in 2015 to 63rd place in 2020. Despite this, more evidence suggests that the business environment for foreign companies in India has not undergone substantial positive changes. According to data disclosed by the Indian Ministry of Commerce and Industry, from early 2014 until November 2021, a total of 2,783 foreign companies shut down their businesses in India. Given that there were only 12,458 foreign branches operating in India during the same period, the closure rate is quite significant. Among the companies leaving India during this period are industry giants like Metro AG from Germany, Holcim Group from Switzerland, Ford Motor from the United States, and Royal Bank of Scotland from the United Kingdom. While some companies claim their exit is due to “adjustment of business strategies” or “changes in their own direction,” many other companies point out that the deep-rooted reasons for their departure are inconsistent local regulatory rules, high tariff barriers, bureaucratic red tape, and officials engaging in rent-seeking corruption.

For foreign companies operating in India, the “disastrous” risks brought about by the Indian authorities are far more frightening than the everyday operational risks. After all, most of the routine operational risks can be mitigated through business strategies and market tools, but once the official institutions take action, companies are almost certain to suffer severe losses. These companies expect a predictable, stable, and transparent policy framework, as well as a judicial system that prioritizes efficiency. However, it seems that India has long stood in opposition to these expectations.

From the legislative perspective, the jurisdiction of the Indian federal government and state governments overlaps, and the wide-ranging legislative timeline creates a multitude of ambiguous laws and regulations and a multitude of avenues for implementation. This results in a significant gray area, giving law enforcement officials tremendous discretionary power at all levels. From the judicial standpoint, India’s judicial system is notorious for its lack of manpower and inefficiency in handling cases, making the legal process intolerably lengthy. Additionally, it is worth noting that in India’s laws and regulations on business and economics, there are as many as 26,134 provisions related to “imprisonment.” The combination of vague legislation, inefficient litigation, and severe penalties creates a situation of “comprehensive legislation, widespread violation, and selective enforcement.” As such, the risks faced by businesses and entrepreneurs operating in India can be imagined.

For instance, Emirates Telecommunications Group and Telenor ASA suffered almost complete losses on their capital investments in India after the Supreme Court of India unilaterally ruled to cancel their second-generation communication network spectrum allocations. When Telenor ASA announced its exit from the Indian market in 2017, the accumulated losses amounted to a staggering $3 billion. Another example is POSCO, which invested $1.2 billion in Odisha, India, to establish the largest foreign investment project in Indian history. However, due to multiple breaches of contract by both the federal and state governments, the project eventually failed, and all initial investments went down the drain. Furthermore, after suffering a loss of 1.3 billion dollars, the joint venture telecom company between Japan’s NTT Docomo and India’s Tata Group was unable to exit the partnership project due to opposition from the Reserve Bank of India. The prolonged delays resulted in significant losses.

The government plays a "disgraceful role"

The ever-changing policies of the Indian government often lead to businesses ending up with no returns. In 2005, telecom company Devas signed a cooperation agreement with a commercial department under the Indian Space Research Organisation to conduct satellite launches and ground broadband network services. However, a few years later, the Indian government unilaterally canceled the contract, rendering Divas’ initial investments and expected revenues null and void. Devas chose to sue and submitted the case to international arbitration. Despite obtaining a favorable ruling after a long process, the Indian government not only refused to compensate as per the judgment but also fabricated various economic charges against Divas and initiated bankruptcy liquidation proceedings against the company to avoid compensation. The reason why this case  has caused a sensational impact can be attributed to three main factors: First, the assertive style of the Indian government, which makes arbitrary decisions leading to devastating consequences for foreign business investment. Second, despite being in the wrong, the Indian government refuses compliance with international arbitration. Thirdly, the Indian government leverages criminal prosecution to pursue the involved enterprises in order to evade compensation. With this combination of measures, it’s no wonder that foreign enterprises are fearful.

If reneging on promises and retaliatory strikes can be considered playing dirty, then the Vodafone incident demonstrates that the Indian authorities are entirely capable of subjecting companies to systemic persecution. In 2007, the mobile communication giant Vodafone Group acquired Hong Kong telecom operator Hutchison Essar for $10.9 billion. Hutchison Essar held a 67% stake in Indian telecom operator Hutchison Essar Limited (HEL) through CGP, a company registered in the Cayman Islands. Essentially, both parties involved in the transaction were located outside India, but the deal encompassed Indian assets. After the transaction, the Indian tax department demanded a capital gains tax of up to $2.2 billion from Vodafone, claiming that CGP’s assets in India had appreciated at the time of the sale. Vodafone refused to comply with the demand. The dispute came to an end when Vodafone appealed to the Indian Supreme Court and won, being relieved of its tax liability, as the Supreme Court found that the Income Tax Act of 1961 did not support taxing foreign entities in this manner.

Surprisingly, in the face of the “legal loophole,” the Indian Parliament pushed for and passed the Finance Act in 2012, specifically amending the Income Tax Act of 1961. This amendment empowered the Indian tax authorities to retrospectively tax Vodafone’s 2007 transaction directly - effectively overturning the previous ruling of the Indian Supreme Court. The Indian tax department immediately imposed a penalty on Vodafone, totaling $5.6 billion, including the principal amount, interest, and fines. In response, Vodafone sought assistance from the Permanent Court of Arbitration (PCA) for international arbitration. After years of entanglement, in 2020, the Permanent Court of Arbitration (PCA) ruled against the Indian government. Not only did the ruling require an immediate cessation of taxation, but it also mandated compensation to Vodafone for its economic losses.

A similar incident also occurred with Cairn Energy, a company based in Scotland. Just like Vodafone, the Indian tax department retrospectively imposed taxes on Cairn Energy, but the decision was again rejected by the PCA. Interestingly, since the Indian government refused to refund the penalties, Cairn Energy had no choice but to seize Indian government assets worldwide to offset the compensation. This included diplomatic apartments owned by the Indian government in Paris, France, as well as overseas assets of Indian state-owned enterprises like Air India.

Although both of these disputes ended with the Indian government’s defeat, the message conveyed is very clear - since the Indian legislative and executive branches can collaborate to retrospectively modify tax rules, they can also do the same in other matters. As long as they are willing, any business operating in India may face catastrophic consequences.

Behind the arrogance and ruthlessness

Since the Modi government eagerly seeks to attract foreign investment to boost its economy, why does it still treat foreign capital with such arrogance? To a large extent, this is related to India’s unique historical trajectory and socio-political atmosphere.

Overall, the Indian government, political parties, officials, and people have long been suspicious of several types of enterprises:

Firstly, multinational corporations. Historically, India’s subjugation to British colonial rule began with the penetration of multinational corporations. Therefore, for India, participating in the global economic circulation through multinational companies does not signify prosperity; instead, it is seen as suffering and exploitation.

Secondly, large-scale enterprises. India’s colonial history showed that any large corporation could become an independent force influencing the direction of politics and the economy. The government could only control and shape them by restricting enterprises to medium and small scales.

Thirdly, new technology companies. Historically, the UK’s technological prowess gained from the Industrial Revolution crushed India’s traditional handicrafts. This means that new technology, while improving productivity, also inevitably causes “disruptive destruction,” which could tear India’s social organization and economic structure, leading to political crises.

Fourthly, asset-light enterprises. Asset-light enterprises primarily operate in finance, media, digital, and service industries, often with relatively low hardware investments in India. As a result, they lack the collateral that can make the Indian government "feel secure" and may trigger a sense of “exploitation” among the Indian people when they feel these enterprises are making significant profits with little contribution and then transferring these profits out of India.

If there is another type of enterprise, it would be the enterprises from “enemy country”- of course, the definition of enemy countries changes over time.

If a company is labeled with any of the above tags, it means it faces risks; if it is labeled with several, it means significant risks; and if it is labeled with all five, risks will undoubtedly be imminent.

Fairly speaking, India is not just suppressing Chinese companies. Many U.S., European, Japanese, and South Korean companies have also faced failure and losses in the Indian market. In this context, the Modi government may find it challenging to immediately change the deep-rooted skepticism towards foreign investment among various local governments, society, and the people in India. However, if the government’s ambition to drive India’s economic rise is strong enough, it will inevitably need to make every effort to improve the business environment and attract foreign investment. For example, in August 2021, the Modi government pushed through a tax law amendment in the Indian parliament, officially canceling the controversial “retrospective” clause, which put an end to the highly disputed Vodafone and Cairn Energy cases. At the same time, in recent years, the Modi government has rapidly improved relations with the business communities of the United States, Europe, Japan, and South Korea, attracting a group of multinational entrepreneurs who once viewed India with skepticism. Entrepreneurs like Elon Musk have shifted their focus back to India, and Modi has even personally guaranteed the safety of relevant companies’ investments in India based on his political credibility.

Chinese enterprises need to be cautious when investing in India

In April 2020, the Modi government introduced the Press Note 3 policy, subjecting investments “from neighboring countries sharing a land border with India” to security scrutiny. As a result, the business environment for Chinese companies in India has not only failed to improve but may have become even more unfavorable. They not only have to deal with inherent operational risks in the Indian market, but also need to be constantly vigilant about policy-related risks.

It is noteworthy that India’s crackdown on Chinese companies, unlike the Vodafone case and the Cairn Energy case, has not generated widespread international concerns. Instead, as it aligns with the Western “decoupling” and severing ties with China, India’s crackdown on China has become an example of safeguarding “national security” and “information security,” receiving tacit approval and even praise. 

At the same time, Indian conglomerates closely linked to the Modi government and Western giants expecting India to relinquish interests are pleased to see Chinese companies leave, so as to create space in the market for them. They are eager to enter the market and seize the opportunity. This indicates that the suppression of Chinese companies not only has not hindered India’s ability to attract other foreign investments but may even catalyze and facilitate such investments. (Enditem)

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