Almost after a year of tightening foreign direct investment (FDI) rules that put Chinese investors on a back foot, India has started reviewing their investment applications as the geopolitical tension on the two countries’ border finally cools down after a nine-month-long standoff.
Since the FDI laws were amended, about 150 investment proposals from China worth more than USD 2 billion are awaiting government approval, a Reuters report said. Citing four sources in the government, Reuters said that India will give the green signal to 45 investment proposals from Chinese companies to invest in India. Almost all the proposals that are likely to get a nod are in the manufacturing sector, a low-risk sector in terms of national security.
Non-sensitive sectors such as automobile, electronics, and chemicals and textiles will be given preference over sensitive sectors that include data and finance.
Mahendra Swarup, founder of investment firm Venture Gurukool told KrASIA that at this point the government is clearing more capital-intensive FDI applications from China that have been long pending. “It only goes to show that India realizes the need for Chinese capital. As long as large capital is coming in India to create assets locally, the government would be happy to do that. These investments would create opportunities for the Indian market making it the next destination for manufacturing in electronics, automobile, and textiles,” Swarup said.
According to him, Chinese manufacturers that were till now serving the western market from China, want to set their base in India as the world looks towards India as the next manufacturing hub.
“You have to look at it from a case-to-case basis. Policymakers will keep all these things in mind. I don’t think that capital not coming [from China] has caused any concern as such for Indian companies. India still remains a prime destination for US, Korean, Japanese, and Middle Eastern venture capital firms,” Ashish Dave, the Indian head of Korean fund Mirae Asset Venture Investments, told KrASIA.
The news comes days after both the countries called their troops back from the shared Himalayan border after nine months of hostilities that included hand-to-hand scuffle between Indian and Chinese armies.
Last year in April, a month before the standoff on the Indo-China border began, the Indian government amended FDI and Foreign Exchange Management Act (FEMA) rules that required investors from countries that share land-border with India, to get approval from the government before investing in Indian startups and corporations.
A preliminary result of the change in policy caused a steep fall in investments from China into Indian startups. Such investments in India fell down from USD 1.23 billion in the first half (H1) of 2019 to USD 263 million across 15 deals in H1 2020.
The amendment was made as a precautionary measure to stop Chinese companies from making opportunistic acquisitions of distressed Indian assets, according to the Department for Promotion of Industry and Internal Trade (DPIIT). The move, however, hit local technology startups the hardest, as they were already reeling from the effects of COVID-19 and were looking to raise growth capital from China.
For example, food tech major Zomato, which was supposed to receive USD 100 million in the second tranche of its USD 150 million funding from Alibaba, got entangled in regulatory approvals. It later raised USD 62 million from Singapore-based fund Temasek.
Chinese investment firms as well as big tech companies have poured millions of dollars into the Indian startup ecosystem in the last few years. In fact, at least 18 of India’s unicorn companies are backed by Chinese firms. In 2019, Chinese investors put USD 3.9 billion in Indian startups, up from USD 2 billion in 2018.
However, as the public sentiment in India got bitter for China due to skirmishes on the border last year, Indian founders have started distancing themselves from their Chinese backers. Last year, Policy Bazaar co-founder and CEO Yashish Dahiya said, the company is ready to buy back Tencent’s 10% shares if they are willing to sell. Indian investors in social media platform Koo have also shown interest in buying Shunwei’s stake in the company that owns a 9% stake in its parent company Bombinate.
Alternatively, Chinese companies are now looking to exit from their Indian portfolio companies. Alibaba has already taken an exit from BigBasket when the latter got acquired by India’s Tata Group earlier this month.
“None of the investors are actively looking at putting money in Indian startups. Like Alibaba, other Chinese investors will also take that route this year. Indian founders are also not very comfortable with being associated with Chinese VCs,” Satish Meena, senior forecast analyst at Forrester, told KrASIA.
While India has started clearing large capital investment proposals from China, it’s yet to be seen if this will fuel confidence in VCs from China to start investing in India’s tech companies. According to Swarup, venture capital investors that were earlier interested in backing early-stage companies in India would shy away from investing.
“Investing in startups is risky as it is, but now they have to deal with an added risk of the government changing regulations whenever it wishes. Unless the geopolitical relations between the two countries improve, we will have to wait before such investments start happening again,” he said.