wednesday, 29 april of 2020


Indian companies hit back at rule to deter Chinese takeovers

Indian authorities are in talks with companies to review new foreign investment rules designed to guard against opportunistic Chinese takeovers, after the proposed regulations spooked investors and threatened to cut off crucial funding for tech start-ups.

Countries including Australia and Germany have unveiled measures to protect companies hit by the coronavirus pandemic, while the EU has urged member states to build stakes in companies to block Chinese acquisitions.

But New Delhi’s expansive order, which the government implemented without warning or public consultation, has triggered uncertainty among Indian companies and venture capital firms that rely on Chinese financial backing.

Karthik Reddy, co-founder of Blume Ventures, an early-stage investor, said “the dialogue is on” with officials over the rule, which requires any entity with “beneficial ownership” linked to China to receive government approval before investing in an Indian company.

“The minute this came out, we said it can’t be one size fits all,” said Mr Reddy, who sits on the executive committee of the Indian Private Equity and Venture Capital Association. “Everyone realises they need capital coming into the markets. Cutting off any one of those arms is going to hurt.”

Mr Reddy’s industry body is pushing for the government to clarify if the rule applies to investment pools and to outline an expedited screening process for approvals. He was optimistic the government would provide clarification within the “next week”.

A commerce ministry spokesperson said he had no information on whether the rules were being reviewed.

The new rule was introduced after the People’s Bank of China increased its shareholding in mortgage company Housing Development Finance Corporation, one of India’s leading blue-chip stocks.

The law has also alarmed Chinese investors.

Chinese tech groups Alibaba and Tencent have stakes in many of India’s biggest start-ups, including payments platform Paytm and ride-sharing platform Ola. Out of India’s 30 unicorns — private companies valued at $1bn — 18 are funded either by big Chinese technology companies or venture capital funds, according to research by Gateway House, a Mumbai-based think-tank.

Ant Financial, the payments unit of Alibaba, has been one of the biggest Chinese investors in India. Its portfolio includes a more than $560m investment in Indian food delivery company Zomato and a large stake in Paytm.

“We think our existing investments will be OK but we are trying to get clarity on what government hurdles we could encounter for follow-on fundraising,” said one person at the company with direct knowledge of the situation.

"A number of large players are asking for clarification," said Kartick Maheshwari, a partner at Khaitan & Co, about private equity firms. "They’ve all raised large Asian capital pools, but because there is no explanation on what constitutes beneficial ownership, even a 1 per cent share in a fund from China may subject Indian investments to prior approval."

Rashmi Guptey, chief financial officer and general counsel at Lightbox, a venture capital firm, said the rule could squeeze the availability of capital just as companies need it to deal with the impact of coronavirus on the economy.

"You restrict the future pool of capital," she said, at a time when funding is already difficult to obtain.

Rehan Yar Khan, managing partner at Orios Venture Partners, the venture capital firm, said that without greater clarity from the government, the rules as they stand would ensnare his new fund because it includes backing from Hong Kong-based investors.

"Essentially your entire PE, VC industry comes to a grinding halt," he said. "The way it’s currently written is that entire pool of capital is now tainted?.?.?.?in its current form it’s completely unsustainable."

(Published by Financial Times, April 29, 2020)

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