With $4 billion Chinese investment, desi startups wary of FDI-policy tweak

BENGALURU/NEW DELHI: Startups are wary of the government move to change the FDI policy in an attempt to restrict investment from China. The move could lead to a further slowdown of FDI investments in an already tough year coming through private equity and venture capital funds, especially in India’s startups, investors told TOI.

Chinese investments in India’s startup ecosystem were also reported to have risen to $3.9 billion in 2019, up from around $2 billion in the previous year. A majority of India’s most valued internet companies — Flipkart, Paytm, Ola, Byju’s, Zomato, Bigbasket, Dream11 — count either Alibaba Group or Tencent, two major Chinese internet conglomerates, as shareholders.

“The new FDI guidelines essentially imply Chinese capital would require prior government approval. In effect, given the uncertainty around approval, startups will shy away from Chinese capital. In the immediate future, this could impact PhonePe and potentially Paytm at a later date. ‘BharatPe’ thankfully has quality India, Singapore and US VCs. We don’t have a single Chinese investor,” said BharatPe CEO and co-founder Ashneer Grover.

Over the last few years, Chinese capital has come to replace American funds. In fact, 18 of the 23 Indian unicorns (startups with over $1 billion value) have Chinese investors.

“Till a few years ago there the US was the only major pool of capital till China also emerged as a major option. With this move suddenly one major pool of capital gets restricted as funds being raised from China will also be under question,” said a venture capital investor who has several Chinese firms as co-investors in his portfolio companies.

It is also likely to change the way founders think, as many were sourcing investments from China not just for capital but also to learn best operational strategies. For instance if a company is getting offers from investors from USA and China, then the former will become the default preference.

Another area to watch will also be how the notification is interpreted for Chinese companies like TikTok which directly operate in India.

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