For fresh rounds of investments, Chinese firms may invoke clauses built into their contracts and in the India-China trade agreement.
At present the approvals for Chinese investments typically take 6-8 weeks.
Many of the large Indian startups, worth over $1 billion in value, count Chinese tech companies and funds as their investors. The protection offered to these existing investors by their contracts and government trade deals, will be a major comforting factor.
"The 18 Indian unicorns (which have Chinese investors) may look for safeguards in their contracts to secure government approvals for further rounds of investments. The surviving provisions of India-China trade agreement will also make it relatively easier for existing investments as compared to when making fresh investments," said an investment banker who is advising Chinese investors.
The likes of Paytm and BigBasket which count Chinese investment giant Alibaba as one of their key investors said they are well capitalised at the moment.
A Paytm spokesperson said, "Post our last fundraise, we are well-capitalized to serve new-age financial services to our fellow country-men and continue our journey towards India's financial inclusion."
Paytm, the India-based mobile wallet service, had last year announced a $1 billion equity round, from various investors, including Alibaba's arm Ant Financial.
A person familiar with Paytm's plans said that its investments by existing investors like Alibaba will not be impacted by the new Foreign Exchange Management Act (FEMA) regulations since it is supposed to be prospective in nature.
"The government is also aware of our plans and there is no specific provision or exemption Paytm is looking to secure from the government at this moment," said this person.
BigBasket had recently received funding of close to $50 million from Alibaba. The investment came when the company was struggling to meet operational requirements due to restrictions imposed by the lockdown.
"The company is still examining the impact of the FDI restrictions. It is not looking to raise funds at this moment but will examine the contract specification and new FDI norms as and when it needs fund infusion," said a person familiar with the company's thinking.
An email sent to BigBasket was not answered at the time of publishing the story.
According to Abhishek Sinha, founder, NotJustLex, a law firm, existing investors may find it easier to get approvals due to the surviving provisions of India-China trade agreement.
Despite India terminating an agreement for promotion and protection of investments (agreement) on 3 October 2018, some provisions have survived. Article 16, says that notwithstanding any termination, the agreement shall continue to be effective for a period of 15 years from the date of its termination in respect of investments made or acquired by China before the date of termination of the Agreement.
"India signed up this agreement, providing China the ‘National Treatment & Most Favoured Nation Treatment’ protection. In light of this, India is contractually bound to adhere to the agreement in respect of all investments made prior to 3 October 2018. Though there is an article in the agreement dealing with ‘exceptions’," said Sinha.
While existing investors will not be much impacted, according to Amit Maheshwari, Partner, Ashok Maheshwary & Associates, it is the new investments from China that will bear the brunt of the change in FDI laws.
"All fresh investments from China will be severely impacted and subject to detailed scrutiny. In the last couple of years, several chinese companies were setting up shop in India and again due to this change, the trend will reverse," he said.
Investors feel that the pain caused by the change in law could be alleviated to some extent if the government puts in place an efficient approval mechanism, especially for minority investments.
"We have lived under the FIPB (foreign investment promotion board) regime for many years in India. But the FIPB used to meet only once a month. If a speedier approval mechanism is put in place, then things should be fine. We don't expect approvals for minority stake investments to be impacted much," said a PE fund manager on the condition of anonymity.
(Swaraj Singh Dhanjal in Mumbai contributed to the story.)