Ban on 118 Chinese apps: The new reality for startups, the gainers, and the likely effect

Priyanka Sahay and M Sriram

Soon after reports of fresh attempts by China to infiltrate into Indian territory in Ladakh on August 31, the government banned a fresh set of Chinese apps, including the popular gaming app, PUBG, in India.

In the latest move, India has banned 118 more apps, sparing not even the smaller ones. People in the startup ecosystem are now bracing for a new reality where Chinese apps and investments will be frowned upon.

“Even though the primary reason given by the government is data security concerns, the clear message is that war and business can’t happen simultaneously," said Atul Pandey, partner at law firm Khaitan & Co.

“After the first wave of bans, Chinese investors were approaching Indian startups, lawyers were suggesting options, and founders were told to delay plans by a few months, if the plans involved China,” said a startup founder.

“Now we are not saying delay plans. Now it is, make a new plan. This looks like it is going to stay,” he said. The startup founder has liaised with Chinese investors over the past year.

224 apps banned till now

On June 29, India had banned 59 Chinese apps, including video-making startup TikTok, citing concerns around sovereignty and security of the country.

Soon after that, it banned another 47. Over 275 Chinese apps had been under scrutiny for alleged violation of national security and citizens' privacy, out of which 224 have now been banned.

Short-term, long-term winners

There are short-term and-long term winners from the ban. Apps in segments which are easy to replicate, such as productivity and utility apps, will see an immediate boost, given that they are easier to build and replicate.

“Tools like app locks and clear memory are low-hanging fruits,” said an investor who did not want to be named.

However, something like Tencent’s PUBG will be difficult to replicate, and will take a longer time to substitute. Existing Indian games with a similar experience, sometimes ranking far lower on app stores, are also likely to see a spurt overnight to the top rankings.

Now that Chinese apps seem to be away from India for the long run, more investors plan to flock to startups to replace the banned apps. Venture capitalists will be one of the most affected by the long-term shift as investors look for large trends to place bets on, not momentary shifts in behaviour.

ShareChat likely gainer

Regional language social network ShareChat is in talks to raise over $100 million, but investors were in a “wait-and-watch mode,” to see how the China situation unravels, said an investor close to the matter.

The new wave of ban could help ShareChat advance talks with investors. After the ban, ShareChat and its sister app, Moj, are consistently on the top 20 apps of Google’s Play Store, with over 150 million downloads combined.

What effect will the ban have?

Not many are convinced about the message from the move to the Chinese government.

“It is still a soft indicator to China. In reality, we cannot survive without dependency on China. Notably, while apps have been banned and FDI has been restricted, there is no restriction on investments in stock markets or on imports from China.

“The rationale that user data from the banned apps is a national security concern seems somewhat excessive, and, in my view, limiting access to a common man’s data is likely to only have a commercial impact," said Karan Kalra, founder of law firm Bombay Law Chambers.

Security concerns could arise if data from phones of government officials were being accessed by foreign governments, he said.

“Sadly, while there is a popular belief that we are hurting their economy by banning these apps, limiting access to technology and global funds, in the overall scheme of things only hurts our own startup community," he said.

Legal consequences

The move could have potential legal ramifications, given that the ban has been imposed without prior notice.

“The same may possibly be challenged as a violation of the principles of natural justice. Given the massive employment opportunities some of these apps had provided in India, as well as the steps being taken by these apps to plug in their vulnerabilities and ensure data localisation in India, it would be interesting to see how the courts view such an action by the government ," said Pandey.

India-China tension

Tension along the India-China border first surfaced in Ladakh's Galwan Valley on June 15, 2020, when 20 Indian security personnel were killed after a clash between the troops of both sides.

Many rounds of discussion were held at the military and diplomatic levels to restore peace after that.

However, on August 31, China made a fresh attempt to alter the status quo in the Pangong Tso area. This is perhaps the first major incident in the region after the Galwan Valley clash.