India has eased foreign investment rules for neighboring countries, allowing automatic approval for entities with up to 10% Chinese beneficial ownership. This is expected to accelerate dealmaking by global funds with minor Chinese backing and provide clearer investment pathways.
The main topics covered are the relaxation of FDI norms, its expected impact on venture capital and startup funding, and the lingering caution from a 2020 regulatory tightening.
While seen as a positive step, significant caution remains among founders and investors due to past uncertainties and ongoing restrictions like sectoral caps and governance rights. The change is particularly noted as potentially aiding growth-stage companies facing a funding shortage.
The easing of foreign direct investment (FDI) norms for countries sharing a land border with India through the automatic route for companies with 10% beneficial ownership might not open the spigot immediately for Indian startups but could be a boost.
It is expected to speed up dealmaking for global venture funds with limited Chinese capital in their investor base. The second is that the move could make it easier for venture capital and private equity firms to raise money from Chinese limited partners (LPs) or fund sponsors, investors and sectoral players said.
âThis modification should give greater confidence to venture funds carrying Chinese LP interest of up to 10% when exploring Indian investment opportunities, without having to navigate the grey areas that previously surrounded the government approval requirement,â said Vivaik Sharma, partner, Cyril Amarchand Mangaldas.
âFor funds that have been sitting on the sidelines precisely because of this uncertainty, the path into India should now be considerably smoother,â Sharma said, adding that applicable sectoral caps, entry routes and other conditions under the FDI framework continue to apply.
However, investors said founders and funds may be cautious about welcoming large pools of Chinese capital, given the uncertainty triggered in 2020 when the government abruptly tightened the rules.
âI don't see the impact playing out right now in regulated sectors; founders are wary of Chinese capital, especially after the experience of other fintech startups with large Chinese shareholdings,â said a founder of a Noida-based fintech startup.
In April 2020, India put in place a regulation requiring investments from countries sharing a land border with it to require prior government approval, rather than automatically as earlier. On Tuesday, some of these regulations were relaxed to boost global investments in Indian companies.
âPress Note 3 was introduced at a particular time in 2020 due to the border situation, and investments from neighbouring countries had to go through a government approval process that could take five to six months. In the venture ecosystem that is a very long time, so the easing of the rules and clarity on beneficial ownership at 10% is a positive move and the industry looks at it very positively,â said Rajat Tandon, president, Indian Venture and Alternate Capital Association (IVCA).
In 2020, several startups with Chinese investors had to scramble to facilitate discounted secondary transactions to help their China-based backers pare down exposure. Some of the biggest Chinese investors in Indian startups then included Alibaba, Tencent, Shunwei Capital and Fosun RZ Capital, which backed the likes of Paytm, Bigbasket, Zomato, Pocket FM, Swiggy, Practo and Udaan.
âNot only startups but several large venture capital firms had to return capital to their Chinese LPs. The government was also scrutinising investments that had Chinese backing. It was better to be cut off from that source of capital than face questions even when a tiny stake didnât translate into any significant ownership,â a partner at a VC firm said. âWhat this will do is bring in a lot of global investors from places like Japan, South Korea, Taiwan and Singapore with under-10% investment from Chinese LPs to increase exposure to Indiaâ.
Overall, however, the sentiment seems to be that the government is easing its policies towards Chinese money, said a partner at an early-stage venture capital firm. He added that this trend might help in growth stage investing where there is a serious dearth in India.
Not all are equally enthused, though.
âInvestment under the automatic route for companies or funds from land border countries (LBC) is now restricted to 10% and must be in a non-controlling manner with no governance rights. Itâs unlikely at this moment, with these restrictions, funds from LBC countries will be queuing up,â said Apurv Sardeshmukh, managing partner and cofounder of corporate law firm Stride Legal.
It is expected to speed up dealmaking for global venture funds with limited Chinese capital in their investor base. The second is that the move could make it easier for venture capital and private equity firms to raise money from Chinese limited partners (LPs) or fund sponsors, investors and sectoral players said.
âThis modification should give greater confidence to venture funds carrying Chinese LP interest of up to 10% when exploring Indian investment opportunities, without having to navigate the grey areas that previously surrounded the government approval requirement,â said Vivaik Sharma, partner, Cyril Amarchand Mangaldas.
âFor funds that have been sitting on the sidelines precisely because of this uncertainty, the path into India should now be considerably smoother,â Sharma said, adding that applicable sectoral caps, entry routes and other conditions under the FDI framework continue to apply.
However, investors said founders and funds may be cautious about welcoming large pools of Chinese capital, given the uncertainty triggered in 2020 when the government abruptly tightened the rules.
âI don't see the impact playing out right now in regulated sectors; founders are wary of Chinese capital, especially after the experience of other fintech startups with large Chinese shareholdings,â said a founder of a Noida-based fintech startup.
In April 2020, India put in place a regulation requiring investments from countries sharing a land border with it to require prior government approval, rather than automatically as earlier. On Tuesday, some of these regulations were relaxed to boost global investments in Indian companies.
âPress Note 3 was introduced at a particular time in 2020 due to the border situation, and investments from neighbouring countries had to go through a government approval process that could take five to six months. In the venture ecosystem that is a very long time, so the easing of the rules and clarity on beneficial ownership at 10% is a positive move and the industry looks at it very positively,â said Rajat Tandon, president, Indian Venture and Alternate Capital Association (IVCA).
In 2020, several startups with Chinese investors had to scramble to facilitate discounted secondary transactions to help their China-based backers pare down exposure. Some of the biggest Chinese investors in Indian startups then included Alibaba, Tencent, Shunwei Capital and Fosun RZ Capital, which backed the likes of Paytm, Bigbasket, Zomato, Pocket FM, Swiggy, Practo and Udaan.
âNot only startups but several large venture capital firms had to return capital to their Chinese LPs. The government was also scrutinising investments that had Chinese backing. It was better to be cut off from that source of capital than face questions even when a tiny stake didnât translate into any significant ownership,â a partner at a VC firm said. âWhat this will do is bring in a lot of global investors from places like Japan, South Korea, Taiwan and Singapore with under-10% investment from Chinese LPs to increase exposure to Indiaâ.
Overall, however, the sentiment seems to be that the government is easing its policies towards Chinese money, said a partner at an early-stage venture capital firm. He added that this trend might help in growth stage investing where there is a serious dearth in India.
Not all are equally enthused, though.
âInvestment under the automatic route for companies or funds from land border countries (LBC) is now restricted to 10% and must be in a non-controlling manner with no governance rights. Itâs unlikely at this moment, with these restrictions, funds from LBC countries will be queuing up,â said Apurv Sardeshmukh, managing partner and cofounder of corporate law firm Stride Legal.
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