The latest conflict along the border between India and China is keeping Indian startup founders on the tenterhooks.
The big question doing the rounds now is whether the next round of government scrutiny will be on startups with large Chinese shareholding. If so, there could be multiple repercussions like increased auditing of systems, slowing down of deal clearances and scrutiny of data sharing and storage for these startups, say industry insiders.
Startups wary of Chinese investments
“Startups would be careful about getting money from Chinese investors now and are also looking to reduce the stake of such investors,” said a founder of an early-stage startup.
There could be problems to these companies with regards to access to regulated businesses, like digital payments, insurance, lending and others.
The Reserve Bank of India, and the insurance and market regulators could get wary of giving licences to entities with large shareholding of Chinese VCs, he said.
“The government should also look into companies which have Chinese investments and use Chinese tech in their products, and how they are safeguarding the data of Indian citizens,” said Sumit Ghosh, co-founder, Chingari. Chingari is a social media platform which works in the same space as TikTok.
May be the government could take a closer look at startups with more than 25 percent Chinese shareholding and encourage large companies to look for an alternate set of investors.
Players like Paytm, Zomato, Ola all count Chinese investors in their cap table.
Problem is around data safety, not services
However, legal experts believe that the ban is a move to rein in consumer and utility apps, which typically capture a lot of user data. The problem is around how this data is being collected and shared, not about the services these players are providing.
Overall, the government will not make a move which can hurt business prospects of Indian startups at the end of the day.
“The government move, pursuant to the last three notifications, is not really against Indian startups but against the transfer of data which is prejudicial to the interests of the country and puts its sovereignty at stake,” said Dipti Lavya Swain, Partner, HSA Advocates.
Swain said that companies which have been singled out were using their apps as their sole business. The government is not against Indian startups with Chinese investments.
App bans not as worrisome as FDI restrictions
Another segment of industry experts believe that these app bans are not as important as the restrictions on capital from China. Moreover, they believe that if the relationship between the two countries improves, a lot of restrictions would be relaxed.
“Also, most of the ban and FDI restriction looks like temporary measures taken to address current market crisis. Needless to say, once these digital companies comply with security and privacy requirements under Indian laws and there is enough evidence to prove that there is no data leak, the ban will obviously be lifted,” said Rishabh Mastaram, founder of legal firm RGM Legal.
While experts suggest that this phase will be over soon and things between the two Asian giants will normalise, startup founders continue to be wary.
The latest case in point is that of food-delivery major Zomato, which had to reach out to other investors in the wake of additional money from Ant Financial reportedly getting stuck in regulatory clearances. Large Indian startups will surely be looking towards alternative sources for capital, given the overall situation in the border areas.
