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Indian startups will need nodal ministry approval to raise funds from China

Indian start-ups, including BigBasket, Paytm, Ola, Byju’s, MakeMyTrip, Zomato and Swiggy, have all raised large amounts of capital from Chinese investors in the past (Reuters)Premium
Indian start-ups, including BigBasket, Paytm, Ola, Byju’s, MakeMyTrip, Zomato and Swiggy, have all raised large amounts of capital from Chinese investors in the past (Reuters)

  • The fresh FEMA notification comes a week after the Indian government made changes in its foreign direct investment policy by mandating government clearance for all foreign inflows from countries with which it shares land borders

BENGALURU: The government on Wednesday amended the Foreign Exchange Management Act (FEMA) to curb investment from countries such as China and Pakistan.

With the new FEMA amendment, any Indian startup looking to raise money from funds or individual investors in neighboring countries such as China will now have to take additional approvals from the nodal ministry, said lawyers and experts.

The fresh FEMA notification comes a week after the Indian government made changes in its foreign direct investment (FDI) policy by mandating government clearance for all foreign inflows from countries with which it shares land borders.

The move comes amid reports of China trying to acquire distressed assets in different industry segments globally, with companies seeing a steep fall in their valuations because of the lockdown measures to combat covid-19.

Indian start-ups, including BigBasket, Paytm, Ola, Byju’s, MakeMyTrip, Zomato and Swiggy, have all raised large amounts of capital from Chinese investors in the past. These companies will now see a significant impact on their future fundraising activities, experts pointed out.

“For companies that already have Chinese investors, raising additional financing from these investors will be subject to an approval process. The resultant uncertainty over government approval will certainly make those conversations more difficult…The core problem, however, would arise in situations of buy-outs/ changes in control where substantial monies are sought to be invested at depressed valuations or for positioning oneself for control," said Vivek Gupta, Partner and Head – M&A and PE Tax, KPMG India.

Prior to the curbs placed by the Indian government, Chinese and other foreign investors looking to purchase equity shares in Indian startups took the ‘automatic route’, which didn’t require any special nod from Indian regulators.

The new curbs now make it mandatory for startup funds and investors in neighboring countries such as China to take additional approvals from the government.

For instance, a food delivery startup looking to secure funds from a China-based investor or fund will have to take approval from the Ministry of Food and Agriculture. A startup in the healthcare space looking to raise money from Chinese sources will have to take approval from the Ministry of Health and Family Welfare.

The FEMA notification also mentions that even “beneficial ownership" by investors from neighbouring countries will be subjected to government scrutiny. However, legal experts that Mint spoke with said the notification does not fully define the ambit of beneficial ownership.

“Even if a fund is not registered in China, but the owners of the fund are Chinese nationals, then investments from these funds will require approval. But what is not clear is a scenario where investments may come from a fund whose Limited Partners could be Chinese nationals…here the notification doesn’t say if this is beneficial ownership," said Atul Pandey, Partner, Khaitan & Co, who advises Chinese companies and funds in India.


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