Fresh Chinese investments in India’s tech economy may slowdown

China's top tech companies such as Alibaba and Tencent have been investing millions of dollars in Indian startups. But these are likely to slowdown after the new Foreign Direct Investment (FDI) policy which has dropped fresh investments from India's neighbours from automatic approval list, which includes China. Not only this transfer of ownership in existing FDI will also require government nod.

Thereby meaning that exits from deals and investments which results in change of beneficial ownership would also require a government nod.

The latest move is part of a series of steps that the government has taken since the start of this week after Housing Development Finance Corp. Ltd (HDFC) said that People’s Bank of China (PBOC) raised its stake in the home lender from 0.8% to 1.01% in the March quarter. This led to concerns that India's most valued companies could be susceptible to hostile takeovers as their market values have taken a severe hit due to Covid-19 related uncertainties.

"Any fresh investment from China would under the recently issued press note require a government approval which would lengthen the transaction time. This could impact any fresh investment in Indian companies with existing Chinese investors having a put/ call option or were courting Chinese companies for big investments,” said Payal Parikh managing partner of ANB Legal.

Considering the government approval is needed even in case of transfer of ownership, even exits could be impacted, she added.

Some of the top Indian tech companies that have Chinese investors include PayTm, Ola, BigBasket, Byju's, Dream11, MakeMyTrip and others. Any fresh investment in these companies from existing investors will face additional scrutiny, increase approval times and consequently lengthen the transaction completion timelines.

According to a February 2020 report by think tank Gateway House, Chinese tech investors have put an estimated $4 billion into Indian start-ups.

"Such is their success that over the five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded. TikTok, the video app, has 200 million subscribers and has overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the U.S. penetration of Facebook, Amazon and Google in India. Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72% share, leaving Samsung and Apple behind," the report said.

This is unlike Chinese investments in a lot of India's neighbours and elsewhere which have been focused on investing in physical assets.

"Existing investments, especially Chinese investments in the digital economy space, as well as the personal electronics space will be grandfathers and not require government approval, any further investments by Chinese firms (either directly or indirectly) will now take place through the approval route," said Atul Pandey, Partner, Khaitan and Co.

In a bid to prevent beneficial ownership from falling in the hand of Chinese firms the notification also restricts any transfer of investments without government nod however, the mode of computation of ‘beneficial ownership’ is still unclear.

Ministry of Corporate Affairs (MCA) guidelines has defined 'individuals' who could be beneficial owners.

"This would impact all transactions which involves foreign investment from or transfer of stake to Chinese investors, irrespective of the amount of investment and whether such investment will lead to acquisition of control, private equity firms having Chinese stake irrespective of whether such stake is a minority stake or even if such ownership is a passive ownership without any control rights, companies not based in China, but whose beneficial interest is with Chinese entities," said Pandey.