India’s Curbs on Chinese Investment Might Affect Its Tech Unicorns

(The Straits Times) — The Indian government’s new curbs on foreign direct investment (FDI) from China might kick the legs out from under the table of the biggest tech startups in India, experts say.

At least 18 of 30 startup unicorns in India already have Chinese capital and any fresh infusion of funds will be monitored hereon under the new rules.

Over the weekend, the department of promotion of industry and internal trade made any FDI from a country “which shares a land border with India” subject to approval from the Ministry of Home Affairs.

Analysts read this change as an attempt to prevent opportunistic takeovers of Indian firms as their valuations and capital dip amid the Covid-19 crisis.

The central government has refrained from naming China in the amended policy, but as the curbs are already in force for Bangladesh and Pakistan, the new policy is clearly targeted at China. Until now, FDI flowed automatically to the firms, and companies only needed to report investments made annually.

The notification also covers entities where Chinese citizens have “beneficial ownership” to ensure that the new restrictions are not dodged by channeling investments through Singapore, Hong Kong or other territories.

Ji Rong, the spokesman for the Chinese embassy called the change “discriminatory” and asked India to “treat investments from different countries equally.”

The changed FDI rule directly affects many tech startups in India.

China is the 18th biggest foreign investor in India, with a share of 0.5% of total FDI invested since the year 2000. But it has shown more interest recently.

Chinese investors like Alibaba Group, Ant Financial, Fosun RZ Capital and Tencent Holdings invested nearly $4 billion in Indian firms in 2019, up from about $2 billion the year before. Most beneficiaries were Indian tech startups.

Under the new rule, fresh funds from existing investors in startups like India’s leading online grocer BigBasket, digital payment platform PayTM, cab aggregator Ola, food deliverer Zomato and e-learning platform Byju’s will face additional scrutiny.

Hari Menon, the co-founder and chief executive of BigBasket, said, “It (the rule) doesn’t affect us right now. We don’t need to raise money for some time.”

China’s Internet giant Alibaba Group has been BigBasket’s biggest shareholder after a $300 million investment in 2018, followed by smaller funding infusions every year since.

“The uncertainty around approval times and the longer timeline for completing a deal may discourage some firms from seeking Chinese capital,” said the founder of a major tech startup who did not want to be named.

Representatives from Zomato and PayTM, which have also received Chinese funds, did not respond to The Straits Times’ queries seeking reactions on the new FDI policy.

“Indian startup funding today has an American, European and Chinese bloc. There is often a cocktail of investments from different mixed funds. We’ll only know details of how that will be affected when the laws are amended,” said Rameesh Kailasam, chief executive of IndiaTech.org, an industry group of Internet-based startups that includes online bookings platform MakeMyTrip and app-based cab operator Ola.

The announcement will become official once the government amends the Foreign Exchange Management Act in the coming days. Some analysts have advised companies to close ongoing funding transactions before the FEMA notification is issued.

“It’s important to remember that Chinese FDI is not banned. It will just go through the scrutiny route now,” added Kailasam.

India’s policy review seems triggered by a surprise disclosure last week by the Housing Development Finance Corporation (HDFC) that the People’s Bank of China had raised its equity stake in India’s biggest financier from 0.8 to 1.01%. The stake is now valued at close to 30 billion rupees ($393 million). The investment occurred between January and March, when HDFC’s shares were sliding during the pandemic.

Market valuations of firms around the world have plunged amid the coronavirus pandemic and the imposition of national lockdowns.

Indian stock markets have fallen 25% since mid-February and the government as well as opposition leaders are in rare agreement about the urgent need for a policy of preventing foreign takeovers during a national crisis.

Italy, Canada, Spain, Germany and Australia have also issued similar warnings about foreign predatory capital investments, and some leaders have explicitly mentioned China’s record of buying up assets during the economic crisis.

This story was originally published by The Straits Times

Contact editor Yang Ge (geyang@caixin.com)