New Delhi: In a move that has been seen as an effort to stop “opportunistic" takeovers and acquisitions of Indian businesses by Chinese establishments amid the global economic meltdown caused by the Covid-19 pandemic, the government on Saturday tweaked its Foreign Direct Investment (FDI) policy to ban investments via the automatic route from countries that share a border with India. FDI from these countries would now require prior approval from the government of India.
China, on Monday, criticised the move saying the changes violate the World Trade Organisation (WTO)’s principle of non-discrimination and called for the “revision of discriminatory practices”. China’s FDI inflows into India are relatively low compared to other major countries such as Mauritius, Singapore and Japan.
However, according to a study by the Gateway House Indian Council on Global Relations, China has created a significant place for itself in India in the past five years in the technology domain through venture investments in start-ups and the online ecosystem.
Chinese tech investors have put an estimated $4 billion into Indian start-ups and China’s tech footprint can be ascertained from the fact that “18 of India’s 30 Unicorns (start-ups with a valuation of $1 billion) are funded by Chinese nationals.
Such funding is making an impact disproportionate to its value, given the deepening penetration of technology across sectors in India, the study said.
Tik Tok, owned by Chinese firm Bytedance, is now one of the most popular applications in India, while Xiaomi and Oppo have over 70 per cent share in the smartphone market in India.
These are investments made by nearly two dozen Chinese tech companies and funds, led by giants like Alibaba, ByteDance and Tencent which have funded 92 Indian start-ups, including unicorns such as Paytm, Byju’s, Oyo and Ola, the report read.
According to the study, BigBasket, an online grocery service, has investments from Chinese firms Alibaba Group and TR Capital.
The Alibaba Group also has investments in Paytm Mall and Paytm.com.
Similarly, popular food delivery services such as Swiggy has received funding from various Chinese firms. Its rival Zomato too has raised money from Alibaba Group and Shunwei Capital.
The study finds the absence of major Indian venture investors for Indian start-ups as one of the main reasons behind China’s penetration into the Indian tech market.
For instance, Alibaba’s 2015 investment in 40 per cent of Paytm, a digital payments platform, paid off barely a year later when in November 2016, the government of India demonetised large number of currency notes and simultaneously promoted a move to a cashless economy.
Paytm benefitted from Alibaba’s superior fintech experience, which it applied to India seamlessly, making it a dominant player, the report stated.
Amit Bhandari, Fellow, Energy & Environment Studies Programme, Gateway House, and one of the authors of the study, said the depth of Chinese funding and influence in the start-up space can be gauged from their motivation of these investments.
“If you look at other investors, there are three-four groups. There is Softbank, Naspers, Sequoia and other American investors. These are all financial investors. When a financial investor puts in money, they are looking for an exit at some point in time. They would be looking for a return very clearly, which is money. From the Chinese side, the big investors are Alibaba, Tencent, and to a certain extent, ByteDance. These are operational companies. They are not looking for an exit. So, they would be willing to take losses for a number of years as long as it means that they are able to get a foothold in the Indian market. So, the motivation of a company and a fund can be different,” Bhandari said.
He said there’s a need to monitor investments that are predatory and, therefore, the change in FDI policy.
“If say Alibaba invests in a company and is willing to take losses for five-10 years to drive others out of business, those are predatory practices, these cannot be permitted because then you are destroying other companies. That is why there is a need to monitor who is investing from China. If you are a financial investor out of Hong Kong, there is no issue. But if you're an Alibaba, then I think it should be seen what is your motivation, how much are you getting, and what will be your control,” Bhandari said.
Chinese investments in the tech space are mostly small in sizes, the report found. The largest Chinese investment in India is “$1.1 billion acquisition of Gland Pharma by Fosun in 2018. This accounts for 17.7 per cent of all Chinese FDI into India.”
The study identified just five other investments by Chinese companies that exceed $100 million. This includes the $300-million investment by MG Motors.
Most Indian start-ups depend on foreign venture capital funding in the absence of any Indian investors willing to commit large sums of money during initial, often loss-making, stages of a start-up.
“That leaves Western and Chinese investors as the dominant players in the Indian start-up space,” the study found.
While the latest tweak in FDI policy is aimed at curtailing “opportunistic” takeovers of Indian companies, it may also put a strain on Indian start-ups.
“In the current economic meltdown, start-ups' valuation is going to take a severe blow. Right now, companies are in distress. At this point, if somebody comes with capital, they can actually take advantage of this distress and cut off much better deals. However, there should not be a distress sale of Indian companies,” Bhandari added.
Comments
0 comment