As the longstanding sparring between India and China shift into high gear on the trade front as well, indications are that it might leave an unlikely victim in its wake - India’s fast-growing tech start-up ecosystem. Indian unicorn success stories like BigBasket and PayTM could well find this week’s tweak to the foreign direct investment (FDI) policy a dampener to their fast paced growth.
The issue? Chinese investors have fuelled the growth of many Indian startup success stories by ploughing in billions of dollars through successful investors like Tencent and Ant, the latter powered by Chinese giant Alibaba. According to the estimates of the think-tank Gateway House, more than half of India’s 30 unicorns (startups with a valuation of more than a billion dollars) are funded by Chinese investors. According to official figures, China has invested more than 8 billion dollars in India in total. The worry now is that with the new government rule making it mandatory for all Chinese investment to get government clearance, further rounds of investment may slow down or even dry up.
“While the intention was to curb hostile acquisitions and material investment in India by Chinese investors during this pandemic, the way they have rolled out the notification is going to affect minor investment deals as well,” said Anuj Golecha, co-founder of Venture Catalysts, a leading Indian VC. Fellow VC Apoorva Ranjan Sharma, co-founder and managing director of 9Unicorns exclaimed, “the revised policy comes as a shock — (when) the COVID-19 crisis has caught entrepreneurs and startup leaders completely off-guard…the government..could have waited.” He added, “Many startups are in dire need of early-stage funding, and the latest move will create an additional barrier between them and foreign investors.”
Indian unicorn BigBasket, for example, had recently received 50 million dollars from Alibaba, which reports indicate turned out to be a big help when lockdown restrictions were being put into place and the company suddenly needed extra cash. But that may not be the case in the future with the rule change. BigBasket refused to comment on the developments when approached by THE WEEK.
Though the policy change is said to have been in the works for months, the immediate ‘provocation’ was the recent hiking of People’s Bank of China’s stake in India’s HDFC from 0.8 per cent to 1.1 per cent—Value of Indian stocks had eroded by 25 per cent since the COVID turmoil hit bourses mid-February onward. Over the weekend, India’s Department for Promotion of Industry and Internal Trade (DPIIT) changed the rules for automatic FDI in India, removing the ‘automatic’ route for all investments from countries sharing a land border with India. Not only would every investment require clearance from the government, another significant change was the ban on indirect acquisition of investments by entities based in China. Now, change in ownership of the investment would also need to be cleared by the Union government.
Is there a way out? Golecha suggests a re-tweaking so that only investments beyond a certain threshold need govt clearance. Vivek Gupta, partner and head (M&A and PE Tax), KPMG India, thinks on similar lines. “The approval process should be designed with a fixed timeline and centrally co-ordinated within the government so that any investment proposal does not have to go through protracted processes.” He also suggests the govt define ‘beneficial ownership’ clearly so that “some of the funds that are actually non-Chinese but have some small Chinese investment will be able to invest under the automatic route.”
