Reining in the Dragon: Time for India to review trade policies with China

The growing presence of Chinese investors in India despite the so-called government restrictions is more alarming than Chinese spy balloons over the Indian sky

Reining in the Dragon: Time for India to review trade policies with China

Nantoo Banerjee

The growing presence of Chinese investors in India despite the so-called government restrictions is more alarming than Chinese spy balloons over the Indian sky (detected by the US) and spy ships close to its territorial water.

These Chinese industrial investors pose a big threat to the nation’s financial and strategic stability. With the economies of Pakistan and Afghanistan in tatters, China seems to be desperate to strengthen its presence in India, a growing source of its exports and financial repatriation.

The annual repatriation of profits and other proceeds from India is growing rapidly. Several Chinese companies in India are allegedly breaking local rules and regulations at will while Indian investors are finding it extremely difficult to establish a foothold in China.

It may be time for the Indian government to make public a factsheet on the number of registered Indian companies operating independently in China, Indian directors on board the companies in China and repatriation of profits and other incomes by Indian firms from China.

In India, all foreign companies can legally repatriate profit and other incomes by way of dividend, share buyback, reduction of share capital, technical services fees, consultancy services or business support services fees and royalty. Chinese investors are taking full advantage of such provisions.

Earlier this year, the government said in a statement that there are many Indian companies which have Chinese directors. In a written reply to Lok Sabha, MoS corporate affairs, Rao Inderjit Singh, said there are 174 Chinese companies that are registered in the country as foreign companies having place of business in India.

“... as per an official database, there are 3,560 companies in India which have Chinese directors. It is not possible to give the number of companies having Chinese investors/ shareholders as the data is not separately maintained in the ministry of corporate affairs system,” the minister said. The Corporate Data Management (CDM) portal has been developed by the ministry as an in-house data analytics and business intelligence unit.

The government had amended certain rules of the Companies Act, 2013 to regulate the incorporation of companies, the appointment of directors, issuance and transfer of securities and undertaking compromise, arrangements and amalgamation in cases where entities are from land border countries such as China.

“New requirements have been provided through such amendments for disclosures, in such cases, about government approval obtained under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 or for obtaining security clearance from the home ministry,” the minister said.

However, the amendment of the Companies Act has clearly failed to achieve the desired objectives, especially pertaining to China. Businessmen from India’s large northern neighbour have been smart in dealing with such regulations. They have exploited India’s democratic system and dishonest middleman to sub-serve their purposes.

Following the amendment of the Act, the government is supposed to closely monitor Chinese companies, corporate persons and service professionals circumventing the new FDI rules. The government directed law enforcement agencies and regulators to share their information with each other when investigating Chinese companies doing business in India for security reasons and tax and customs duty evasion.

Last year, Income-tax authorities accused Huawei’s India unit of repatriating Rs 750 crore to the parent company in China to reduce its taxable income here. Earlier, Chinese phone maker Vivo was charged for remitting about Rs 62,476 crore of its turnover to China between 2017 and 2021 to avoid paying taxes in India.

Business houses and investors from China have been showing a nonchalant attitude towards Indian government’s new rules and regulations. They have been constantly coming to India to do business on their own terms, corrupting the system with the help of greedy local clients and dishonest service providers, including chartered accountants.

Chinese investors are setting up sugar syrup units in India to feed many of India’s so-called “pure honey” bottlers. Chinese investments are pouring into India’s industrial sector. India had approved as many as 80 FDI proposals involving Chinese entities as of 29 June 2022. The government received over 380 proposals from Chinese affiliated entities since India imposed restrictions on FDI from China.

Chinese companies had been reportedly gathering the personal data of a large number of Indians for the benefit of their government and trade. Several Chinese companies recently came under government scrutiny for tax evasion and other financial non-compliances.

In April 2022, the government passed the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, in what was seen as an attempt to further crackdown on prohibited Chinese investment in India. The purpose is ‘to enhance’ the accountability of chartered accountants and company secretaries.

The Union government recommended action against some 400 chartered accountants and company secretaries for assisting Chinese shell companies to incorporate in India by manipulating the established regulations.

It was reported that the Institute of Chartered Accountants of India issued disciplinary notices to over 200 CAs for their alleged role in aiding several Chinese firms to violate the Companies Act, through their India-incorporated subsidiaries and shell companies in recent years.

The corporate affairs ministry had issued an order to the Registrar of Companies in Delhi and Haryana, initiating action against at least 100 CAs and company secretaries. The move was associated with 174 Chinese companies for alleged professional misconduct and unlawful activities.

It is high time that the government designs its investment and trade policies with China on a reciprocal basis.

It is interesting to note that the rapid growth of Chinese export and investment to India started in 2017 as the communist country’s outward investments in the US and European Union started witnessing a dramatic decline over concerns about the role of the authoritarian regime in Beijing and the possible security implications.

Concerned about national security and as part of the ongoing broader trade friction with China, both the US and EU have cracked down on several Chinese companies.

Officially, India has maintained frosty relations with China following a bloody border clash in June 2020. Following the clash, India blocked China from participating in government tenders, compelled Chinese companies investing in the country to seek approvals and banned dozens of Chinese apps.

Yet, they seem to have had little impact on India’s growing imports from China and Chinese business activities in India. It’s time that India becomes truly concerned about the growing Chinese business expansion in India before it is too late.

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