From Paytm to Byju’s to Dream11 ⁠— Chinese investors have big money in India’s biggest startups

• The recent standoff at the Indo-China border has already seen a call for ban on Chinese products as well as uninstalling Chinese or Chinese-funded apps in India.
• Experts believe that this will put a hold on further tech investments in India and thus, startups need to prepare themselves.
• Chinese investors have pumped in an estimated $4 billion into India’s tech startups which includes bets on 18 out of the country’s 30 unicorns.

From the India-China tensions at the border to the Indian government’s recent restrictions on FDI stating that prior government approval is required for any investment from a bordering country, the startup ecosystem has a lot to worry about. The rising scepticism about China and its investors affects some of the biggest startups in India like Paytm, Ola, Byju’s and more.

China’s biggest funds and their bets in India

Source: Gateway House

Tensions at the borders and India’s tech ecosystem

The recent standoff at the Indo-China border has already seen a call for ban on Chinese products as well as uninstalling Chinese or Chinese-funded apps in India.

Experts believe that this will put a hold on further tech investments in India and thus, startups need to prepare themselves.

“The immediate impact of this can be observed in business relations as well, with contract cancellations, trade deficit and fundings being put on hold. To mitigate this direct impact on the startup ecosystem, startups will have to scout for other avenues for big-ticket investments while seeking support from investors from newer geographies. Companies which fall under the portfolio of Chinese investors will also have to look for new alternatives as their transactions will get delayed due to these macro events,” said Roma Priya, Founder of Burgeon Law.

Chinese investors have pumped in an estimated $4 billion into India’s tech startups which includes bets on 18 out of the country’s 30 unicorns, according to a Gateway House report. And even though some of India’s companies like Sharechat even have ‘Made in India’ in their Google Play store listing, the funding for the startup is from China.

What makes Chinese investment attractive?

With India having the next big internet users, Chinese funds have been betting on the country’s virgin internet users and the lack of an Indian major investment fund only aids their growth.

Most of India’s startups – from Paytm to Ola and Swiggy, Zomato – are still reporting heavy losses, which means they would require investments with minimal investor pressure. “China provides the patient capital needed to support the Indian start-ups, which like any other, are loss-making. The trade-off for market share is worthwhile,” said a report by Gateway House.

The damage was done from even before the border clash

Earlier in April, the change in FDI regulations said that prior approval of the Indian government will now be required for FDI into India (direct or indirect) by an entity of a country which shares a land border with India, i.e., China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.

And this would have a direct impact on India’s startup ecosystem which relies on Chinese investments. “Chinese investors like Alibaba, Tencent and others will be heavily impacted. (i) Rights issuances; (ii) share buybacks; (iii) exits of existing investors from an Indian company which result in an increment in a Chinese investor’s stake will now require prior approval of the Indian government, although there may be no fresh inflow of FDI. Private equity and venture investors may not be able to effectively exercise call options, rights of first offer, anti-dilution or ratchet provisions.” said a report by the law firm Majmudar & Partners.

However, China has for long now routed its investments through subsidiary companies. “Chinese funds and companies often route their investments in India through offices located in Singapore, Hong Kong, Mauritius etc.: for example, Alibaba’s investment in Paytm was by Alibaba Singapore Holdings Pvt. Ltd. These don’t get recorded in India’s government data as Chinese investments,” said a report by Gateway House.

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