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New Delhi: In a move seen as an effort to stop “opportunistic” acquisitions and acquisitions of Indian businesses by Chinese establishments amid the global economic crisis caused by the Covid-19 pandemic, the government on Saturday changed its policy. Foreign Direct Investment (FDI) prohibit investments through the automatic route from countries that share a border with India. FDI from these countries would now require prior approval from the Indian government.
China criticized the move on Monday, saying the changes violate the World Trade Organization (WTO) principle of non-discrimination and called for “a review of discriminatory practices.” FDI inflows from China to India are relatively low compared to other major countries such as Mauritius, Singapore and Japan.
However, according to a study by Gateway House’s Indian Council on Global Relations, China has created an important place for itself in India in the past five years in the technology domain through risky investments in startups and the online ecosystem.
Chinese technology investors have invested approximately $ 4 billion in Indian startups and China’s technology footprint can be determined by the fact that “18 of India’s 30 unicorns (startups valued at $ 1 billion) They are financed by Chinese citizens.
Such financing is having a disproportionate impact on its value, given the deepening of technology in all sectors of India, according to the study.
Tik Tok, owned by Chinese firm Bytedance, is now one of the most popular apps in India, while Xiaomi and Oppo have more than 70 percent share of the smartphone market in India.
These are investments made by nearly two dozen Chinese tech companies and funds, led by giants like Alibaba, ByteDance and Tencent that have funded 92 Indian startups, including unicorns like Paytm, Byju’s, Oyo and Ola, according to the report.
According to the study, BigBasket, an online grocery service, has investments from Chinese firms Alibaba Group and TR Capital.
The Alibaba Group also has investments in Paytm Mall and Paytm.com.
Similarly, popular food delivery services like Swiggy have received funding from various Chinese companies. Rival Zomato has also raised money from Alibaba Group and Shunwei Capital.
The study finds the absence of large Indian venture capitalists for Indian startups as one of the main reasons behind China’s penetration of the Indian tech market.
For example, Alibaba’s 2015 investment in 40 percent of Paytm, a digital payments platform, paid off just a year later, when in November 2016, the Indian government demonetized a large number of banknotes and at the same time Time promoted a move towards a cashless economy.
Paytm benefited from Alibaba’s superior financial technology expertise, which was seamlessly applied to India, making it a dominant player, according to the report.
Amit Bhandari, a member of Gateway House’s Energy and Environment Studies Program, and one of the study’s authors, said the depth of Chinese funding and the influence on startup space can be measured from his motivation to these investments.
“If you look at other investors, there are three or four groups. There are Softbank, Naspers, Sequoia, and other American investors. These are all financial investors. When a financial investor invests money, he is looking for a way out at some point. They would be looking for a return very clearly, which is money. On the Chinese side, the big investors are Alibaba, Tencent and, to some extent, ByteDance. These are operating companies. They are not looking for a way out. Therefore, they would be willing to take losses for several years, as long as that means being able to establish themselves in the Indian market. So the motivation of a company and a fund may be different, “said Bhandari.
He said that it is necessary to monitor investments that are predatory and, therefore, the change in FDI policy.
“If we say that Alibaba invests in one company and is willing to suffer losses for five to 10 years to drive others out of business, those are predatory practices, they cannot be allowed because it is destroying other companies.” That is why it is necessary to control who is investing from China. If you are a financial investor outside of Hong Kong, no problem. But if you are an Alibaba, then I think you should see what your motivation is, how much you get and what your control will be, ”said Bhandari.
The report found that Chinese investments in the tech space are mostly small in size. China’s largest investment in India is “Fosun’s $ 1.1 billion acquisition of Gland Pharma in 2018. This represents 17.7 percent of all Chinese FDI in India.”
The study identified only five other investments by Chinese companies that exceed $ 100 million. This includes MG Motors’ $ 300 million investment.
Most Indian startups rely on foreign venture capital financing in the absence of Indian investors willing to commit large sums of money during the initial, often losing, stages of a new venture.
“That leaves Western and Chinese investors as the dominant players in India’s startup space,” the study found.
While the latest adjustment in FDI policy aims to reduce “opportunistic” acquisitions of Indian companies, it can also put pressure on new Indian companies.
“In the current economic collapse, the valuation of new companies will have a severe blow. Right now, companies are in trouble. At this point, if someone comes with capital, they can actually take advantage of this angst and close better deals. However, there should be no urgent sale of Indian companies, “added Bhandari.
