Curbs on Chinese investment may hurt India's tech unicorns

It is true that, 18 out of 30 Indian tech start-ups, the main beneficiaries of Chinese investors last year, already have Chinese FDI into India is small at $6.2 billion, but its impact is already outsized, given the increasing penetration of tech in India

Chinese funding to Indian tech start-ups is making an impact disproportionate to its value, given the deepening penetration of technology across sectors in India. TikTok, owned by ByteDance, is already one of the most popular apps in India, overtaking YouTube; Xiaomi handsets are bigger than Samsung smartphones

These are investments made by nearly two dozen Chinese tech companies and funds, led by giants like Alibaba, ByteDance and Tencent which have funded 92 Indian start-ups, including unicorns such as Paytm, Byju’s, Oyo and Ola

The new rule by the Government of India to control on the Foreign control by infusing fresh funds , now any fresh infusion of funds will, under the new rules, be monitored. New Delhi's new curbs on foreign direct investment (FDI) from China might kick the legs out from under the table of the biggest tech start-ups in India, experts say.

The department of promotion of industry and internal trade made any FDI from a country "which shares a land border with India" subject to approval from the Ministry of Home Affairs.

It is an attempt to prevent opportunistic takeovers of Indian firms as their valuations and capital dip amid the Covid-19 crisis.

Central government has refrained from naming China in the amended policy but, with curbs already in force for Bangladesh and Pakistan, the new policy is clearly targeted at China.

Until now, FDI flowed automatically to the firms, and companies needed only to report investments made annually. The notification also covers entities in which Chinese citizens have "beneficial ownership". This is to ensure that the new restrictions are not dodged by channelling investments through Singapore, Hong Kong or other economies.

Mr Ji Rong, the spokesman for the Chinese embassy, called the change "discriminatory" and asked India to "treat investments from different countries equally." The changed rule directly affects many tech start-ups in India.

China is the 18th biggest foreign investor in India, with a 0.5 per cent share of total FDI invested since 2000. But it has shown more interest recently.

Chinese firms such as Alibaba Group, Ant Financial, Fosun RZ Capital and Tencent Holdings invested nearly US$4 billion (S$5.7 billion) in Indian firms last year, up from about US$2 billion the year before. Most beneficiaries were tech start-ups.

Under the new rule, fresh funds from existing investors in start-ups like India's leading online grocer BigBasket, digital payment platform Paytm, cab aggregator Ola, food deliverer Zomato and e-learning platform Byju's will face additional scrutiny.

Industry group IndiaTech.org chief executive Rameesh Kailasam said: "Indian start-up funding today has an American, European and Chinese bloc. There is often a cocktail of investments from different mixed funds. "We'll only know details of how that will be affected when the laws are amended."

The announcement on FDI will become official once the government amends the Foreign Exchange Management Act in the coming days. "It's important to remember that Chinese FDI is not banned. It will just go through the scrutiny route now," added Mr Kailasam.

Other countries, including Italy, Canada and Germany, have issued similar warnings about foreign predatory capital investments, and some leaders have explicitly mentioned China's record of buying up assets during an economic crisis.