Investments from China will now need government nod

The amended FDI rules may have significant impact on fundraising by the Indian Startups.

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The government has amended the Foreign Direct Investment (FDI) policy to discourage opportunistic investment in Indian companies by neighbouring countries in the midst of the Coronavirus pandemic.

This comes after China’s central bank recently raised stake in Housing Development Finance corporation. This investment raised eyebrows in the finance world and Corona virus was seen as the opportunity grabbed by the Chinese companies to procure stakes in the various companies after the market fall down. China’s central bank already had a stake in HDFC which it raised further to cross the reporting limit of 1%.

Many experts and evangelists appealed to the government to act immediately to block the China investments as they come with the ulterior motives. Government of India amended its FDI Policy. FDI restrictions were earlier placed on Pakistan and Bangladesh.

(Copy of the amendment can be obtained here on the dpiit website)

As per the new amendment, Foreign Direct Investments into Indian companies from the neighbouring countries will now require a nod from the government. This will be applicable to all countries that share a land border with India – such as China, Nepal, Myanmar etc.

Earlier, reports said that market regulator Securities and Exchange Board of India (SEBI) was monitoring equity transactions in India by Chinese companies and banks. Such transactions have come under the scanner at a time when the share prices of companies have dropped due to the economic impact of the coronavirus pandemic.

Globally, transactions by Chinese firms and institutions have come under scrutiny recently since the assets are being purchased at low valuations. Nations such as the US, Japan and Australia have already placed restrictions on Chinese companies buying assets.

Impact on Startups

Though there will be impact on the listed companies, this amendment is also poised to affect the startup ecosystem.This amendment will have a direct impact on the Indian startups. Many Indian startups have Chinese investors, which will now require the permissions from the Government. Some of the most prominent startups which may be affected are Paytm, Big basket, Ola, Oyo etc. These startups would now be required to obtain permissions from the Indian government before raising further investments from the Chinese investors.

Three major chinese companies are found to be big investors in Indian startups. Tencent Holding, Alibaba (including alipay and ant financial services) and Huawei through its venture capital arm have taken more than $1 billion bets on India’s startups.