Bleak future for Indian start-ups funded by Chinese investors

According to experts, this will have major impact on new investments by Chinese players in companies, such as Paytm, Ola, BigBasket, Byju’s, Dream11, MakeMyTrip, and Swiggy, when they go for follow-up funding.

Chinese investors, such as Alibaba, Tencent, and Xiaomi, are active in the Indian start-up space, and have collectively invested billions of dollars.

Chinese investment in Indian start-ups is expected to face major hurdles as Sino-India tension escalates.

With both countries locked in a stand-off, India is expected to increase the level of scrutiny of investments coming from China - both directly and indirectly.

According to experts and industry insiders, this will have major impact on new investments by Chinese players in companies, such as Paytm, Ola, BigBasket, Byju’s, Dream11, MakeMyTrip, and Swiggy, when they go for follow-up funding.

Chinese investors, such as Alibaba, Tencent, and Xiaomi, are active in the Indian start-up space, and have collectively invested billions of dollars.

“My apprehension is that investments in sensitive sectors may be subject to deeper inspection by the government,” said Atul Pandey, partner at law firm Khaitan & Co.

Analysts said firms and start-ups looking to raise further funding from Chinese investors - both existing and newer ones - may be well advised to look into other alternative sources.

The government had recently made changes to its FDI policy and introduced strict measures to curb opportunistic takeover due to the COVID-19 crises.

It had introduced a pre-clearance mechanism on investments from China.

The government is keenly scrutinising all existing applications involving investments from China (and potentially Hong Kong), said Pandey, who has been regularly interacting with private equity funds and investors from China affected by this move.

Pandey said he has assisted clients in filing necessary applications with the government seeking its approval and has been advising them to adopt a wait-and-watch approach.

Officially, there hasn’t been any change in the Indian stance since Press Note 3 came out in April.

There is no dividing line between the government and private business in China.

If there is Chinese investment in sectors such as media, social media or fintech, they will be in a position to spread disinformation or misuse sensitive data for other purposes.

Therefore, monitoring of such investments is needed, said Amit Bhandari, Fellow, energy and environment studies at foreign policy think tank Gateway House.

According to Sumit Kochar, corporate lawyer and partner at advisory firm Dolce Vita Trustees, Chinese companies have pumped money into Indian unicorns like Paytm, Snapdeal, Swiggy, Ola, Zomato and soonicorns that possess commercial and personal data of millions of Indian users.

Though exposing or using the data for any illicit means may have serious implications, according to Indian laws, Kochar is of the view that the Chinese firms may try to grab the sensitive data these firms are holding to retaliate through other channels.

On Wednesday, it was reported that Indian Intelligence agencies asked the government to block or advise people to stop using 52 mobile apps linked to China.

The list included videoconferencing app Zoom, short-video app TikTok, UC Browser, and file-sharing app Shareit.

In India, China tech giants and venture capital (VC) funds have become the primary vehicle for investments largely in tech start-ups.

This is different from other emerging markets where Chinese investments are mostly in physical infrastructure.

According to Gateway House, even though Chinese FDI into India is at $6.2 billion, its impact is already outsized, given the increasing penetration of technology into India.

Analysts believe that the deal flows into the country have already been impacted due to recent changes to India new FDI policy.

“Chinese VC investors are (becoming) increasingly anxious and in some cases even withdrawing term sheets that were on the table.

"The present escalation further complicates life for Indian start-ups,” said Salman Waris, managing partner at New Delhi-based specialist technology law firm TechLegis Advocates & Solicitors.

Start-ups, looking to raise capital from Chinese investors, will now need to rework their strategies from scratch (due to FDI restrictions).

This will cost them both time and money.

This, coupled with the fall in the basket of investors to choose from and the uncertainty with regard to the availability of VC, is making Indian start-ups defer IPO plans, enforce paycuts, implement furloughs, cut investment round sizes, and accept unfavourable bridge rounds with compressed valuations, added Waris.

N Raja Sujith, partner and head of South India at law firm Majmudar & Partners, is of the view that one needs to be mindful of the fact that Chinese investors are still not barred from investing in Indian firms.