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India-China tension| Startups may find it more difficult to attract Chinese funds

Revised FDI norms had slowed down approvals, the border clash will make it even more difficult to get Chinese investment, say experts.

June 17, 2020 / 06:35 PM IST
(Representative Image: PTI)

(Representative Image: PTI)

The death of at least 20 Indian soldiers in a savage clash with Chinese troops in Ladakh’s Galwan Valley is likely to hit the country’s technology sector hard, with industry experts saying the government may want startups to go slow on partnerships and investments from China.l

Several entrepreneurs told Moneycontrol, on condition of anonymity given the sensitivity of the situation, of the difficult conversations they were having internally as the ties between the two Asian giants plunge to an all-time low.

“These incidents are bound to slow down the decision-making on Chinese FDI into India,” said a top executive associated with a policy body that works closely with the government on Chinese investments.

Chinese companies have pumped in close to $8 billion in Indian startups over the years, industry estimates say. The bloodiest faceoff in 45 years between the two neighbours will throw further challenges in corporate tie-ups and FDI flows from China.

ALSO READ: From Paytm, Flipkart to Swiggy, big Indian startups are stuffed with Chinese money

There was anyway a delay in granting approvals for Chinese investments in Indian companies, a top industry source said, referring to the recent tweaks in the FDI policy.

The applications that were filed have not made much headway, he said. On April 17, the government said that FDI coming from any country sharing a land border with India would need government approval.

The government, the industry source said, had tightened the norms with China on the mind and it would now be fair to assume that the approvals would all be slowed down.

“Investors are already very closely looking at the bilateral relationships,” he said.

India-China Border News LIVE

The startup ecosystem was trying to convince the government not to apply the new strict FDI rules to small investments in early-stage companies.

In a letter to Commerce Minister Piyush Goyal, the Startup Association of India on April 28 had sought relaxations for Chinese investments, which industry insiders say will be hard to secure now.

“There could be a further delay in the clarifications that were awaited on the amendments to the new FDI rules…since these amendments came in, a few applications have also been filed with the government and approvals haven't come through yet,” said Dipti Lavya Swain, a partner at legal firm HSA Advocates.

The Ladakh incident could make further investments in regulated entities extremely difficult but it was still too early to draw a conclusion, another entrepreneur said.

Keep a watch 

One sector that is bound to see scrutiny is the lending space, a fintech entrepreneur said.

The Chinese fintech startups have been showing keen interest in the Indian market and have already sensed multiple opportunities. Some early investments have happened, including in players like Kissht, Krazybee and others. Paytm, of course, is one of the largest investments of Chinese major Alibaba in India.

“Those companies, which were looking to lend from their own books, will be impacted if they have Chinese investors or large shareholdings. For them to get a regulatory nod might become difficult,” the fintech entrepreneur said.

Chinese companies have already tasted success in the telecom space, be it Oppo, Xiaomi and others. Chinese companies together account for around 75 percent of the smartphone market in India, according to Counterpoint Research’s Q1 2020 figures.

What will happen to the hardware players is not clear.

“I believe investments in sensitive sectors such as banks and defence have always been looked at very closely, but other sectors like early-stage startups may not see any immediate impact,” said Bhavik Hathi, managing director at consultancy firm Alvarez and Marsal.

Regular deal-making should not be affected by geopolitical issues, said some industry insiders. Corporates would be interested in securing their financial interests and the Chinese have pretty large investments in India already, they reasoned.

“While these incidents do affect sentiments, those investors which are in it for the long run should not be flustered by these events. We expect deal momentum to continue but in the immediate future, both investors and founders, will adopt a cautious approach,” said Ntasha, cofounder of Venture Gurukool, which helps Indian startups reach out to Chinese investors.

Read our complete coverage on the India-China border tension.

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Pratik Bhakta
first published: Jun 17, 2020 06:35 pm