Bengaluru: The government is preparing a policy framework to regulate foreign investments more closely in internet and smartphone businesses, especially in view of the increasing Chinese presence in these sectors, said three people familiar with the matter.
Government agencies including the defence ministry, information technology ministry and the Telecom Regulatory Authority of India (Trai), besides the Reserve Bank of India (RBI), are working on new policies, the people cited above said on condition of anonymity.
The proposed policies are meant to deal with the increasing digital colonization of India, said the people cited above. The aim is not to stop or restrict foreign investments but to install safeguards that will ensure India’s security is not compromised, they said. This assumes significance as Chinese and American companies either directly control large parts of the internet business or have tremendous influence as investors in local start-ups, even in strategically important areas such as financial services and content.
Over the past 18 months, after Japan’s SoftBank Group, Chinese companies led by Alibaba Group, Tencent Holdings and Xiaomi Inc. have become the most influential investors in the start-up ecosystem. Xiaomi is also currently the highest-selling smartphone brand in India.
Given that Chinese smartphone brands control a majority of the Indian smartphone market, regulators have identified three key threats related to Indian consumers—addiction, surveillance and manipulation. The threats have been categorized under the acronym of ASM, two of the three people said.
“The deeper concern is around national security, while the whole thing is around colonization. China is at the heart of this entire debate, especially from a national security perspective," said one among the two.
Some of these policies have already been implemented. In April, RBI issued a policy on the storage of payments system data, which requires digital payments providers to store data in India.
“To ensure better monitoring, it is important to have unfettered supervisory access to data stored with these system providers as also with their service providers/intermediaries/third-party vendors and other entities in the payment ecosystem," RBI had said in April.
More policies on localization of data are expected to be announced.
The debate around data colonization has already alarmed sections of the Indian start-up ecosystem and there is a broader consensus emerging on the need to have proper policies in place to prevent a complete Chinese and American takeover of the start-up ecosystem, said a top India-based venture capitalist on condition of anonymity.
However, it will be tricky for India to regulate Chinese and other foreign investments in a strict manner. As a group, Chinese firms have become the most important investors in the internet business that most Indian institutional investors and companies have shied away from. Additionally, high quality, low-cost smartphones made by Chinese companies have allowed tens of millions of Indians to use the internet.
“Chinese companies are here to stay. They have become an essential part of the smartphone and internet ecosystem. The government cannot afford to turn away Chinese capital; so, any regulation will have to be light," said the venture capitalist quoted above.