In 2017, Chinese pharmaceutical company Fosun Pharma acquired 74 per cent stake in Hyderabad-based Gland Pharma for $1.1 billion. It was the biggest acquisition by a Chinese company in India, and only five other foreign direct investments by Chinese companies have exceeded $100 million. However, Chinese investors and technology companies have been far more active in India’s startup ecosystem, pumping in more than $4 billion. “Chinese FDI into India is small at $6.2 billion, but its impact is already outsized, given the increasing penetration of tech in India,” said a report by the think tank Gateway House.
This is exactly why the government on April 18 announced new foreign direct investment norms, barring FDI via the automatic route from countries sharing land borders with India. In effect, it is now mandatory for investors, direct or indirect, from China to seek government approval before making investments in Indian companies. “The government does not want hostile takeover as, because of Covid-19, valuations of a lot of companies have seen a downfall. Other economies are also taking such measures,” said Roma Priya, founder of Burgeon Law.
The apprehension is that the Chinese economy is relatively less affected by the pandemic and therefore Chinese companies may be keen on shopping. The government’s new FDI norms will enable safeguarding of Indian businesses against opportunistic takeover threats as they become “tempting targets in the current scenario,” said Vipin Sondhi, MD and CEO of commercial vehicle maker Ashok Leyland.
Mahesh Singhi, founder of investment banking firm Singhi Advisors, said the new norms would ensure that ownership and management of Indian companies would not slip out of hands cheaply. “In some companies, including some large business houses, promoter stake is low. With the current beaten down valuations, these companies are vulnerable, not only because of a threat of hostile takeovers, but also with a fear of accumulation of a large chunk of stake by investors with hot money or by disruptive investors,” he said.
About two dozen Chinese tech companies and funds have funded 92 Indian startups, according to data from Gateway House. Its study shows that 18 of India’s 30 tech unicorns have Chinese investors. Over the past few years, many of these startups have looked to grow aggressively, and Chinese companies like Alibaba and Tencent have been more than willing to fund this growth.
So, will the move affect startup funding?
“In the short term, the new FDI rules will have an impact,” said Makarand Joshi, partner, MMJC and Associates, a corporate compliance firm. Singhi said the startup technology funds would take a beating. “So, tomorrow if another Ola or Paytm goes to the market to raise capital, they will find it difficult not only to get new investors but also to meet the benchmark valuation expectations set by earlier rounds of fundraising,” he said.
Some experts argue that with local capital availability limited and other major markets like Europe and the US struggling with the pandemic, imposing restrictions on investments from China may not have been the best thing to do. “China has been one of the power backers of our startup unicorns,” said Priya.
China has said that the new rules are discriminatory and they breach World Trade Organisation rules. Meanwhile, as the world and India brace for a huge economic impact from the pandemic, India’s startups may well be in for a long wait before they can get fresh rounds of funds.