A Brief Analysis on Chinese investments in Indian Unicorn Startups: The Galwan clash that arose due to China claiming Indian territory had left 20 Indian army soldiers martyred. The clash triggered public outrage where boycott of all Chinese companies and their products was demanded. In some cases, politicians even spilled their outrage by calling for a boycott of Chinese cuisines.
After increased escalations, 49 Chinese apps were banned by the government. This, however, has left many unclear when it comes to Indian firms that have received funding from Chinese investors. “Should these companies and their products be boycotted as well?”, was the question in the minds of many. Many such companies were left in a critical state hoping that no such backlash is directed towards them.
Today, we have a look at the chinese investments in Indian Unicorn Startups. Here, we are going to analyze the scale of Chinese investments in Indian companies and the added agony they face trying to survive the COVID-19 environment.
How much China holds on the Indian Economy?
Investments from China have totaled up to $8.7 billion ever since 2015. Of these $2 billion were made in 2018 which went on to increase in 2019 to $ 3.9 billion. 18 out of the 30 unicorns i.e. companies that have a valuation of $1 billion and above have received funding from Chinese investors.
However, it is not only the Chinese investments that had significant Indian market reach. Chinese companies too have enjoyed a significant grasp on the Indian Market. Chinese smartphones like Oppo and Xiaomi led the Indian market with an estimated 72% market share in 2019.
Government concerns over Chinese Investments
When it came to investments, Indian relations with China were not any better prior to the clashes either. The only difference is that the restrictions placed on the Chinese investments have gained significant public support post the clashes. As on April 18th, the government issued an update on the FDI policy.
This prevented direct investments into Indian companies from countries that share their borders with India. This was done in order to ensure that any investment directed into Indian firms are done so with a purely financial interest instead of those with strategic economic interests.
China has been particularly blamed for following this approach as they try to further their domestic economic interest. Unfortunately, for us, they also have played an active role in the Indian startup ecosystem. Under the updated FDI policy billions of dollars from Chinese investments will be subject to government scrutiny. The FDI policy was updated also to address Data security and Chinese propaganda concerns. Any Chinese investor investing in Indian firms will have to get the Indian government’s approval first.
When this rule was first passed it drew considerable criticism from Indian unicorns and startups. This criticism was not in defense of the Chinese but instead simply because the Indian investor simply does not prefer to make risky investments or simply does not have that amount of domestic capital. This would not only hurt the Indian startups severely but the effects would also be seen on the Indian economy. This would be because of the shortage of investments Indian companies would face which would be required to spur their growth.
Loopholes and Legal Consequences
Legal experts also said that enforcing the notification would be “close to impossible“. It is also unclear how effective the law is going to be. In the case of Paytm, Alibaba simply rerouted its investments from China to its subsidiary present in Japan and then invested in Paytm.
It is also unclear up to what extent of investment by Chinese investors in a foreign firm will make the firm an entity that furthers Chinese interests under Indian laws.
The FDI laws in China, however, have already been geared up to retaliate. These work against companies that operate in China but originate from countries that have discriminated against Chinese investors.
Chinese investments in Indian Unicorn Startups
The table below shows some of the major Unicorns that have received funding from Chinese investors:
Indian Unicorn Chinese Investments Received Major Chinese Investors
Paytm 900 million Ant Financials (AliBaba Group) and SoftBank Vision Fund
Ola 1.225 billion Softbank , Tencent, Sailing Capital, China Eurasian Co-op Fund, Eternal Yield International, Steadview Capital
Udaan 585 million Hillhouse Capital, Tencent
Swiggy 500 million Meituan-Dianping, Tencent Holdings and Hillhouse Capital Group
Zomato 750 million Ant Financial
BigBasket 300 million Alibaba Group
Dream11 100 million Steadview Capital and Tencent
Byju 40 million Tencent
Flipkart 300 million Tencent Holdings and Steadview Capital
Oyo 100 million Didi Chuxing
Why Indian companies go for Chinese investments?
Over the years India has acquired the third spot in terms of startup ecosystems but unfortunately, more than 80 percent of the money invested in these startups comes from outside of India. One of the major reasons for startups accepting Chinese investment has been due to the lack of capital present in India or lack of capital directed towards innovation-driven startups. Domestic investors have taken very little interest in the startup environment.
We also lack companies like Google and Facebook that take particular interest in such startups that are innovation-driven and with internet dependant products. Unfortunately, the country’s highest-valued firm, Reliance Ltd. in recent times also has to lookup to Facebook for investments. When it takes companies of that scale to grab the attention of global investment giants it is difficult for startups to do the same. Chinese investment firms recognized the gap and have succeeded in replacing American giants in this space.
Another reason is the patient capital provided by Chinese investors. The companies targeted by Chinese investors are mainly startups in their initial stages. The aim of a startup at this stage is to ensure growth and increase market reach. But these goals demand huge capital expenditure.
At the initial stages, these startups are evidently not profitable for a couple of years. This is where the patient capital provided by the Chinese steps in. Unlike domestic investors looking for profitable companies or secure investment, the Chinese investment firms recognize viable startups and provide them with the capital that helps them grow.
(India taking on dragon – An Image featured in Taiwan Times)
The Galwan clash post the updated FDI policy has put further restraint towards accepting Chinese investment. Indian startups that were particularly looking to raise funds in order to survive the COVID-19 environment will now have to look elsewhere.
Companies that already have settled agreements with Chinese investors will also be affected. This is because they may already be in the midst of investments that take place over multiple rounds. They will be forced to restrategize in the times of COVID-19 where they are desperate for investments at lower valuations.
In the midst of the deteriorating India-China relations, demands for an alternative to the capital that were earlier provided by Chinese investors. But if we shed some light on PM’s call for an ‘Aatmanirbhar Bharat’ it also provides solutions if Aatmanirbharta in investments is followed.
Startups in 2019 raised Rs.40,000 crore. For Aatmanirbharta to be achieved in investments at least 50% i.e Rs. 20,000 crore will have to be sourced from within India. But in order to spur this growth, the root causes due to which domestic investors steer clear of startups must be addressed.
One of the reasons is that navigating through thousands of startups before investing. Weeding out those that may lack the commercial potential takes substantial skill and effort that all may not be ready to devote. The answer to this may be provided by Alternate Investment Funds(AIF) or Venture Capital Funds. These specifically focus on investing in startups and at the same time employ necessary skill in order to differentiate between startups.
But, at the moment only investors with a minimum annual income of Rs. 50 lakh and minimum net worth of Rs. 5 crores are allowed to invest in AIF’s. Government support and new regulations that focus on making the environment more inclusive will go a long way in providing the necessary support to startups in India.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.