In a move to curb opportunistic takeovers during the pandemic, specifically from Chinese entities, the Centre has recently revised FDI policy, making it mandatory for prior government approval for direct investments from countries with which India shares a border. This restriction had earlier applied for investments from Pakistan and Bangladesh. Though the Centre has not specified China, the spurt of investments by Chinese investors has prompted the Government to take this decision.
Let's review the extent of investments made by how China dominates the investments of Indian startups.
China Linked Investments
A recent report has estimated that China-linked investments in India's tech startup sector alone stands at $4 billion. These investments could be small, but Chinese funding the tech sector is at the core of India's economy and is significant due to the essence of tech investments and its penetration across sectors.
The big players like Alibaba, ByteDance, and Tencent have funded over 90 Indian startups. The companies having significant Chinese investments include Big Basket, Byju's, Delhivery, Dream 11, Flipkart, Hike, MakeMyTrip, Ola, Oyo, Paytm, Paytm Mall, PolicyBazaar, Quikr, Rivigo, Snapdeal, Swiggy, Uddan, Zomato. TikTok, a popular app in India, is owned by ByteDance. Xiaomi handsets enjoy a larger market share than Samsung smartphones. Huawei routers are widely used.
One may note that the Chinese tech investments are intangible assets of small sizes – rarely over $100 million. This is on an insignificant value of only 1.5% of the total Chinese (including Hong Kong) FDI into India. However, this doesn't cover investments made by funds based out of Singapore and other Southeast Asian countries, where the ultimate owner is Chinese, so the actual investment in India will be higher.
The single most significant Chinese investment in India was the $1.1 billion acquisition of Gland Pharma by Fosun in 2018. This accounted for 17.7% of all Chinese FDI into India. Chinese investors have focussed on e-commerce, fintech, media/social media, aggregation services, and logistics.
Chinese venture capitalists participated in over 54 funding rounds last year. This has boosted their presence and made it one of the most significant sources of funds for startups in India, joining well-established investors like Sequoia and SoftBank. With a valuation of over $1bn, two-thirds of India's startups have at least one Chinese VC investor.
Chinese VC Aggressively Scout Deals in India
India has witnessed a seven-fold jump of $459 million of Chinese funding since 2016. Though 2020 has not witnessed a great start for India Inc, the startups have seen a surge in funding from China. Venture Capital flows have seen a steeper rise from Chinese counterparts time when PE/VC investments from the US and Europe are declining
The financial investors are looking at long-term investments and want to diversify their portfolios or pick up stakes in promising startups. Shunwei Capital, China Lodging Group, China-Eurasia Economic Cooperation Fund, and Baring Asia, are among the new investors. Another recent entrant is Ping An Global Voyager Fund, which has invested $70 million in Jaipur-based CarDekho, an auto tech company. This is its initial investment in India, and the fund has planned to pump in $20-$35 million more for the country.
What's interesting is that these investors are looking at the pandemic and the current economic slowdown as an ambitious opportunity to benefit from the demographic setup, technology know-how, and high-quality entrepreneurs.
In terms of sectors, information technology will remain at the top of the agenda for Chinese investors in India. There have been quite a few techs and e-commerce investments, and the sector will continue to attract more funding.
Apart from the influx of funds within India, Chinese investors are also promoting domestic startups to expand their base in China by providing distribution reach or even becoming anchor customers for some types of solutions. The CarDekho-Ping An deal is a perfect example of this.
It also brings to the table technology and R&D support for tech startups via its eight research institutes around the world, and a portfolio of 20,000 patents related to AI, ML, fintech, and health-tech. That's a lot of additional potential tech horsepower that smaller, resource-constrained companies can benefit from.
Concerns on Such Exposures
As the COVID-19 pandemic batters economies across the world, China is on a spree taking over companies in the dwindling economies. The European Union and other Governments have stepped in to curb these growing hostile takeovers and to tighten foreign investment regulations in recent weeks.
Indian startups, to no small extent, rely on overseas venture capital (VC) funding. Some Chinese conglomerates have their ecosystems that comprise of online stores, payment gateways, messaging services, etc. An investment by a Chinese firm loops the Indian company into this ecosystem, which may lead to loss of control over data.
Chinese investors promote the use of pre-existing Chinese solutions in these startups for its tech requirements – again leading to breach of access to data. If these processes are adopted across a range of companies – be it the taxi service or a hotel aggregator, or online retail outlets, or a payment provider – it permits an intrusive, comprehensive profile of an individual and their habits. A similar concern was established by the Zoom calling app, which prompted the Government to ban the use of the app for online teaching during the pandemic.
India's Restrictions Fraught With Risks
Measures taken for the protection of Indian companies resonates well with global trends and is a populist measure for the domestic audience, the move appears to have been rushed. When we analyze the FDI patterns in India, India received a cumulative $456.91 billion in FDI over the last two decades, with over 72 percent of it coming from just five countries – Mauritius, Singapore, Japan, Netherlands, and the United States. The proportion of China's FDI in India during this period constituted a mere $2.34 billion of total inflows. Though the rate of China's FDI exposure to India has been increasing over the last few years, the proportion is still negligible, making it hard to explain such selective targeting.
Over the years, governments in India have welcomed investments from China, because India has a huge trade deficit with China. Investments were one way to partially bridge. The blanket FDI ban will have severe consequences for sectors like automobiles, construction, and real estate, and other service sectors, which are already stressed due to decelerating demand, tepid lending, and India's inherent weakness in capital formation.
At this juncture, when Indian corporates reel under a severe liquidity crunch due to rising non-performing assets, banning Chinese investments doesn't augur well. One must comprehend that despite the foreign investment, operating control of firms still rests with Indian promoters.
The much-needed boost for the Indian economy, which is currently reeling under the twin shocks of crippled growth and the COVID-induced shutdown, is to refuel consumer demand by generating adequate employment. This is possible through a capital infusion in the private sector.