In April, the government amended the country’s FDI rules, which now state that FDI investments into India by an entity of a country that shares a land border with India, or when the beneficial owner of investment into India is in or is a citizen of such a country, can invest only under the government route. India also banned certain Chinese apps, including popular social media platforms TikTok and WeChat.
What is the likely impact on the tech industry?
According to The Print, the revised FDI rules will slow down the pace of Chinese investments in India’s technology-driven businesses and will act as speed-breakers that halt the march of Chinese investments in India’s technology. Companies will now have to adhere to stricter compliance norms in order to invest in India.
While many have welcomed the changes in the FDI rules, some worry that the impact may not be favourable for businesses. According to Santosh Pai, partner and head of the China desk at Link Legal India Law Services, the immediate impact is the uncertainty surrounding ongoing transactions. “Chinese venture capital funds which have signed term sheets might not be able to complete transactions and remit their investments in a timely manner due to the uncertainty surrounding the newly introduced FDI approval process,” he says.
The amended rules may also slow down Indian start-ups, as the Financial Times reported that two-thirds of start-ups valued at more than $1 billion now have at least one Chinese venture capital firm as an investor.
What additional policy changes might be implemented?
While the Indian government has brought about these changes, it is unlikely there may be any further major policy changes in the immediate future. Pai says that a new equilibrium will emerge, which will indicate which venture capital investments are favourable and which are sensitive.
“Such clarity will help VC funds refine their India strategies. Structuring of funds will undergo a transformation to suit Indian regulatory preferences,” Pai says. “This might include some innovative financing models that are already popular in China such as the VIE structure that became hugely popular as a method to circumvent China’s FDI prohibition in the internet sector when Sina, Alibaba and others raised funds in the U.S.,” he notes.
Meanwhile, Indian startups are reportedly looking to fill the void left by Chinese apps, and certain Silicon Valley venture capital funds have even issued open pitch invitations to such founders.
“While this might solve the funding gap it remains to be seen whether such startups will be able to scale their business models and successfully pivot towards new trends without obtaining insights into the Chinese ecosystem,” Pai says.
How will India’s tech industry evolve as a result?
The implementation of the amended rules now implies that, for example, an American company can invest in India without placing its proposal before the government, but a Chinese company can’t do the same. Due to this, it may take a while before the tech industry in India is able to adapt to these new changes.
According to Pai, the growth of the Bharat model targeting the non-urban Indic language market, which was favoured by Chinese venture capital investors, might be stymied. It is also feared that valuations of Indian startups might dip because Chinese VC funds were known to be generous in their valuation methodology.
Although the situation may seem a little bleak at the moment, the new laws might actually open new doors for the Indian technology industry. As Pai says, “Not all of these are negatives as a course correction some-times injects maturity and eliminates bubbles in a fast-growing space.”
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