BUSINESS NEWS - India is the latest country to announce restrictions on foreign investment, aimed at ensuring China is not able to use its comparatively sound financial strength to accumulate an attractive portfolio of international assets at Covid-19 knockdown prices.
It is the first of the Brics (Brazil, Russia, India, China, South Africa) countries to take a publicly hostile stance against China in the wake of the Covid-19 crisis and has prompted speculation about whether South Africa – where asset prices have been hit by the double whammy of Covid-19 and Moody’s rating downgrade – might be considering a similar move.
To date no country has specifically mentioned China as the likely target of the new restrictions, but a reading of the restrictions leaves little doubt.
Over the weekend the Indian Ministry of Commerce said that any entity based in or tied to a country that shares a land border with India would require government approval before investing in an Indian company. The ministry said the move was aimed at curbing “opportunistic takeovers of Indian companies due to the current Covid-19 pandemic”.
A recent report released by international law firm Baker McKenzie describes how the pandemic has heightened the tendency towards rising national protectionism that had been evident across the globe in the pre-Covid-19 era. “Now Covid-19 has prompted some countries to take an even more stringent approach,” says Baker McKenzie.
European countries have been particularly keen to put up barriers to international investors on the look out for bargains.
The EU commissioner for internal market and services says the pandemic could mean Europe needs to rethink its industrial policy in a post-globalisation era and, in a comment that could only be directed at China, said that now may be the time to take into account things like being too dependent on one country, one region or one company.
“On 25 March the European Commission published guidelines for EU Member States calling on them to adopt or strenuously enforce their foreign investment screening mechanisms to protect sensitive assets from foreign takeover during the crisis.”
Last week the EU trade commissioner went a significant step further and urged member countries to toughen their vetting of foreign takeover bids, warning that the pandemic had left the EU’s “strategic assets” vulnerable to foreign acquisition.
Baker McKenzie believes that despite increased protections, most cross-border transactions will continue to have a high likelihood of being approved, except those in strategic sectors. These may encounter more scrutiny and face a prolonged approval process.
However, it seems that in the dark Covid-19 shadow, the EU Commission’s definition of ‘strategic’ has been expanded extensively.
It now includes health, medical research, biotechnology and infrastructures that are essential for security and public order. Despite the tougher stance the EU says it maintains a “general openness to foreign investment”.
Strongest calls from weaker countries
Remarkably, the introduction of tougher new restrictions has been led by some of Europe’s weaker economies such as Spain, Italy and France.
Spain has announced a comprehensive list of sectors where approval will be needed for non-EU investors. The list includes energy, transport, water, health, communications, media, data processing/storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities, a wide range of critical technologies including those with access to sensitive data, and sectors dealing with the supply of key inputs relating to energy, raw materials and food security.
Where the non-EU investor in any of the above sectors would hold a stake of more than 10% or acquire the right to participate in management, the transaction will need government approval.
In addition, Spain will require approval for any investment into any sector if the foreign investor is “directly or indirectly controlled by the government, including public bodies or the armed forces, of a third country”.
Spain’s move was followed in early April by Italy, where the government issued a decree substantially expanding the list of strategic sectors governed by its so-called ‘Golden Power’. The Golden Power gives the Italian government broad discretionary powers to veto a transaction or impose conditions on its completion.
Countries ‘ready to protect’
The French Ministry of the Economy and Finance has said it is ready to protect important French companies by recapitalising them, buying shares, or even taking them over. The French government has set up a €300 billion fund to support its companies and has said nationalisation of strategic companies will not be ruled out if deemed necessary.
Even Germany has indicated that it is considering stricter oversight of the acquisition of strategic assets by non-EU players.
The tougher EU stance may be influenced by recollection of the impact of the global financial crisis on the countries worst hit by the austerity measures introduced to address that crisis.
Chinese state companies became major shareholders in two of the countries worst affected, Portugal and Italy.
In many instances Chinese companies presented the only credible bids for utilities that had to be privatised as well as other businesses struggling in the wake of the 2008 crisis.
Australia has also announced what it says will be temporary changes to its foreign investment review framework. Baker McKenzie says the Australian moves are designed to protect the national interest in light of the economic implications arising from the spread of Covid-19.
Speculation that the SA government was looking at similar steps to protect its strategic asset base could not be confirmed.
A spokesman for the Department of Trade, Industry and Competition (dtic, formerly the dti) said that to the best of his knowledge the issue is not being considered within his department. But he added that if it were, the Protection of Investment Act would be the most likely tool to prevent “opportunistic” foreign investment. That Act, which was signed into effect in mid-2018, replaced bilateral investment treaties between SA and several countries and gives foreign investors only the rights and protections available to South African investors.
However one competition lawyer contends that the quickest and most effective way to address any concerns government might have would be a presidential proclamation of a previously approved – but not enacted – amendment to the Competition Act.
The controversial amendment was approved by Parliament and signed into law in early 2019 but was not proclaimed and so did not become effective.
In terms of the amendment, intended to address public interest concerns, the president would be mandated to establish a committee to consider whether a merger involving a foreign investor might have an adverse effect on the national security interests of the country. The Competition Tribunal could only approve such a merger if the president’s committee had approved it.
“It’s been passed by Parliament so all that’s needed is for the president to proclaim it,” the competition lawyer told Moneyweb.
Another option, suggested by a corporate lawyer, is to amend the Takeover Regulations to require additional approvals in the event of a takeover by a non-SA entity. He suggests that government could beef up its defence capacity by using funding from the International Monetary Fund to purchase stakes in strategic businesses.
But any such moves, even if not specifically targeted at China, risk unsettling the complex relationship with South Africa’s single most important trading partner.
As Cobus van Staden notes in a recent China-Africa Project report, Africa “does not have endless options” as it considers how to deal with the global pandemic.
Van Staden describes the relationship between Africa and China as “glassy calm on the surface with massive currents deep below”.
He says the recent brief outbreak of hostilities caused by the mistreatment of Africans in the South China city of Guangzhou was an aberration prompted by social media.
Van Staden tells Moneyweb he would be surprised if SA introduced measures similar to those taken in Europe – “simply because SA is generally so focused on courting investment”. And if other international partners are facing economic dire straits of their own, says Van Staden, SA will probably want to increase its economic interaction with China post-Covid.
SA unlikely to curb investment
In similar vein, local investment analysts dismiss the notion that the cash-strapped South African government has any power or inclination to curb much-needed investment regardless of the source.
“Our situation is different,” says Jean Pierre Verster, CEO of Protea Capital Management. “We need foreign exchange, and they may seem like cheap assets but we would be getting something in return.”
He adds that in any case there are few strategic assets left in SA and that there should be no restrictions on non-strategic assets.
Asief Mohamed, chief investment officer at Aeon Investment Management, cautions against any decisions that could be seen to target one country alone. “The issue should be considered on a case-by-case basis, and international investors as a whole should be considered, not the Chinese specifically.”
Mohamed told Moneyweb the impact of the Moody’s downgrade had been priced into the local market over the last couple of months.