Home / Companies / News /  FDI cap in digital media may hit valuations, fundraising

The government’s decision on 28 August to restrict foreign direct investment (FDI) in digital news media companies to 26% is likely to hit investment activity and may lead to a reconsideration of valuations, said industry observers and market participants.

While the government’s decision is primarily aimed at original news content producers, news aggregators may get impacted, too. “The valuation of news aggregators depends on a number of factors, including revenue, traffic generated and growth, besides expansion plans. With FDI restricted, it would result in funding deficiency, and expansion may get hit. This would certainly hit valuation," said Atul Pandey, partner, Khaitan and Co.

In recent years, several news aggregators, including Inshorts and Dailyhunt, have gained in popularity and attracted investor interest. Dailyhunt, which aggregates news from several newspapers and websites, offers content in 13 regional languages, including Marathi, Gujarati, Tamil and Bhojpuri. It has been a favourite among investors, and was most recently backed by Goldman Sachs, Belgian firm Sofina and Sequoia Capital, among others.

It is currently in talks with Japan’s SoftBank Vision Fund for a $150 million investment, Mint had reported in May.

Private equity giant Carlyle is also set to invest $100 million in Dailyhunt, said one person directly aware of the matter, requesting anonymity. China’s ByteDance, which owns TikTok and Helo, and is one of the most valued tech startups, is also an investor in Dailyhunt, according to Bloomberg.

Industry experts said fundraising plans and existing capital structure may have to be significantly altered to be in line with the proposed law. Tiger Global-backed Inshorts also offers similar service and has raised money from prominent investors such as Flipkart co-founders Sachin and Binny Bansal.

Dailyhunt, which is run by Verse Innovation Pvt. Ltd, and Media Labs Pvt. Ltd-owned Inshorts did not respond to emailed queries.

Both the companies and their investors meanwhile expect the government to clarify and provide more details on the announcement, and plan to engage in a dialogue before the Centre implements the proposed rule.

“The policy announcement will not have the force of law unless the same is issued under a press note amending the FDI policy. Foreign exchange management rules also need to be amended. Till then it is only a plan," said Pandey at Khaitan and Co.

The government is also expected to clarify whether digital media also constitutes foreign news websites that do not have a physical presence in India. There is great ambiguity, Pandey said.

“Media firms affected by the rule are not going to just accept it lying down and are already planning to approach the government to seek clarity and express their views, and investment challenges," said another top lawyer, requesting anonymity.

Driven mostly by the large base of young users in India, content startups looking to tap into the regional markets have seen increased investor interest, especially since the entry of Reliance Jio in late 2016 with cheap data rates, which resulted in improved data penetration.

Regional language social network ShareChat, for instance, raised $100 million in a Series D round led by US-based micro-blogging platform Twitter.

Mint had reported on 16 July that ByteDance is also looking for an opportunity to invest in the Indian content space. It has set up a team to scout for content, social commerce and education technology companies.

Similarly, social media giant Facebook is scouting for early-stage content deals in India, Mint had reported on 20 March. However, a lot of these investment plans could be derailed because of regulatory uncertainty.

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