New procurement rules: Hong Kong stopover leaves MNCs in India stranded

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NEW DELHI: Multinationals using regional headquarters in Hong Kong to set up operations in India or do business in the country have got caught in the crosshairs of new government procurement rules ostensibly targeted at Chinese companies.

The government is looking into the issue after industry flagged it to the finance ministry, said people familiar with the matter. They said ownership could be taken into account during the registration process.

The finance ministry had issued an order on July 23 amending the General Financial Rules 2017 “to enable imposition of restrictions on bidders from countries which share a land border with India on grounds of defence and national security”. The move was largely seen as targeted against China, coming in the wake of border tensions.

By extension, the rules apply to Hong Kong since China controls the territory. Companies from such countries are required to register with a government body involving prior security clearance before bidding for contracts. Several German companies in the technology space have been impacted by the move. Industry has sought clarification on whether these provisions applied even to entities that have no investment from either Hong Kong or China, but merely have an office in the territory through which business or investment is routed to India. Industry has sought an exemption or a carve out for them.

“A number of these companies are not Hong Kong based as each of these companies in turn is a 100% owned subsidiary of UK, Europe or US-based companies. Thus, Hong Kong is just a pass-through country,” said Ved Jain, past president of the Institute of Chartered Accountants, making a case for some sort of relief.

Under the amended rules, bidders from the impacted countries will need to register with a committee set up by the Department for Promotion of Industry and Internal Trade (DPIIT) and require political and security clearance from the home and external affairs ministries.

Hong Kong, which was administered until 1997 by the UK and is a global financial centre, was used by investors from the US and Europe to route their Asian investments. Many continued to operate from there even after the administration was handed over to China.

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