Chinese network vendors Huawei and ZTE may face rough weather in India in the wake of the recent changes made to the country's Foreign Direct Investment (FDI) policy.

Under new rules, clearance will be required for all investments by countries that share land borders with India. The rules apply to all sectors of the economy, irrespective of the amount of FDI currently allowed. While China is not specifically named, it is thought to be the target of the new policy. That could have a significant impact on Chinese firms that are already significant investors in India.

Several prominent Indian firms, including PayTM, Ola, Swiggy, Zomato, BigBasket and Snapdeal, have Chinese investors, with Alibaba, Tencent and Ant Financial some of the most prominent.

A spokesperson for the Chinese Embassy has already reacted by calling the move "discriminatory" and saying that China hopes India "would revise relevant document practices," according to reports.

The move follows reports that China is trying to acquire distressed businesses whose market value has dropped because of the coronavirus pandemic. The notable deal was the People's Bank of China upping its stake in India's largest private bank, HDFC Bank, to 1%.

India's policy is similar to measures adopted by Australia and discussed by the European Union. Last month, Australia announced that the foreign investment review board would scrutinize all foreign investments. The EU has also raised concerns about hostile takeovers of businesses by Chinese firms.

The development is likely to have an impact on Huawei and ZTE. However, the signals from the government regarding the Chinese vendors are unclear. Indian service providers are still looking for clarity on whether they can source 5G equipment from Huawei and ZTE, after the government took a long time to include the Chinese firms in 5G trials. Moreover, Indian authorities have already introduced rules to ban from government tenders any foreign vendors based in countries that block Indian suppliers. That move was believed to be targeted at Chinese vendors. (See Huawei, ZTE may face India exclusions after government move.)

Efforts to scrutinize every investment look like a further attempt to curtail Chinese influence in India and add to the general anti-China sentiment amid the outbreak of COVID-19. (See Amid COVID-19, China dependence no longer seems such a good idea.)

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Nearly 20% of India's wireless networks use Chinese equipment. Government-owned BSNL has relied heavily on Chinese firms, which are thought to provide much lower-cost equipment. Vodafone Idea and Bharti Airtel also use network gear from Chinese vendors in several service areas.

But operators will now be wary of procuring Chinese gear in the future. This is especially likely to create problems for Chinese firms in the Indian 5G market after auctions that are scheduled to be held in August and September 2020.

The Indian telecom industry is already facing several challenges, including rising industry debts. Both Huawei and ZTE are struggling to maintain the profitability of their Indian operations and were recently forced to cut jobs in the country. The new FDI rules just add to their troubles in India. (See Indian market woes trigger job cuts by Huawei, ZTE.)

— Gagandeep Kaur, contributing editor, special to Light Reading