Despite the government declaring that investments from China in Indian firms need specific approval, Chinese venture funds are still actively scouting for deals in India, at a time when relations between the two countries have hit an all-time low.
In a violent face-off with Chinese troops in the Galwan valley, at least 20 Indian soldiers were killed.
Chinese funds, among the largest investors in Indian startup ecosystem, are still issuing term sheets to early stage companies in spaces such as content, gaming, and online education — spaces that will gain from the COVID-19 pandemic.
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Shunwei Capital, CDH Investments, Morningside Ventures and Fosun, are among the firms which have issued term sheets — a commitment to invest — with three commitments in the last week alone, said people familiar with the matter.
"Deal flow from China has resumed and the sentiment recovery is better than expected," said Santosh Pai, partner at Link Legal India.
With over 500 million internet users, India is only second to China itself- a big reason for investors chasing Indian startups. Chinese funds also see similarities between the two countries, such as a rising middle class and rural consumption rising-driving business models such as video and audio content, commerce and payments.
The government notified on April 18 that foreign direct investments from neighbouring countries will be subject to specific approval. Although China was not named, it was clearly the intended recipient. Immediately after the rule, some Chinese investors went slow on deals, and many asked for clarification and a relaxation of some provisions.
However, investor interest seems to have returned and it seems they have made peace with the new rule, and are working around it to ensure dealmaking is done without glitches.
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"Chinese investors are used to scrutiny in most countries. And India is an attractive market, so money will find its way. Investors are happy to go the approval route, especially when India was regulating them less than many other countries so far," Pai added.
Chinese investors have deployed over $5 billion in Indian startups so far. Barring VCs, strategic investors such as Alibaba and Tencent are also large shareholders in Indian unicorns such as Flipkart, Paytm, Ola, Byju, BigBasket, among others.
Over the last few weeks, these Chinese funds have pushed forward on deal making, even leading some law firms to hire people during the lockdown to handle the increased workload.
However, many investors are still debating the terms of the new rule, whose broad nature and lack of clarity also put other VC funds in its spectrum.
One unintended consequence is that the new law also covers venture capital and private equity funds, whose investors (limited partners) may be Chinese institutions or high-net-worth individuals, and are now subject to scrutiny.
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At the heart of the debate is the definition of beneficial ownership, whose meaning changes depending on whether the Companies Act, 2013 or the Prevention of Money Laundering Act, 2002 is used as reference. The new law does not specify. Legal experts say that ideally, under this law, if a Chinese investor is the largest beneficiary from the investment, only then it should need approval.
However, in some cases, funds are raised from a blind trust, where beneficiaries of the trust do not know of the holding pattern of the trust i.e. whether it is from China or not.
In some cases the nationality of the fund manager (general partner) is seen to determine the same. However, a GP does not always need to be an individual, and can also be a firm, which will have various partners.