India’s recent move to curb foreign direct investment (FDI) from countries including China may stymie the expansion of Chinese technology giants in the country, leaving startups in the world’s second most populous nation scrambling for funding and hi-tech know-how, experts say.

Last month, India implemented a new policy barring investment without official clearance from any bordering country – including China, Myanmar, Bhutan, Nepal, Pakistan and Bangladesh – in what is widely seen as a move to stave off takeovers by Chinese firms amid the economic fallout caused by the coronavirus outbreak. The government did not mention China in its new policy statement, but said the changes were meant to curb opportunistic takeovers and acquisitions.

China has called India’s new rules “discriminatory” and said they violate the World Trade Organization’s principles of free and fair trade. Of India’s 30 unicorns, or private companies valued at US$1 billion or above, 18 have funding from Chinese sources – whether big Chinese technology companies or venture capital funds, according to research by Mumbai-based think tank Gateway House.

A sign for Paytm at a stall selling snacks in Bangalore, India in February 2017. Chinese tech giant Alibaba and its affiliate Ant Financial are major shareholders of Paytm, India’s most valued start-up. (Picture: Bloomberg)

As growth slows in their home market, Chinese companies and investors have been exploring opportunities in other markets including India, which is the world’s fifth-largest economy. As of December 2019, China’s cumulative investment in India exceeded US$8 billion, far more than the total investments of India’s other border-sharing countries, according to a statement by the Chinese embassy in New Delhi last month.

India is one of the latest countries to join in a global backlash against Chinese capital, which has seen countries such as the US, Germany, France and Britain block high-profile Chinese acquisitions in recent years.

Due to the new restrictions, Chinese companies whose expansion strategies involve investing in India will find their activities “rather restrained going forward,” said Liuqing Yu, an analyst at The Economist Intelligence Unit (EIU).

This new barrier to entry for Chinese money will also present opportunities for other international investors while dampening those for Chinese companies, said Ben Wootliff, head of the Asia cybersecurity practice at risk consultancy Control Risks.

“It’s not like there is big indigenous venture capitalist money in India… But there are still massive pools of money coming out of the US,” Wootliff said.

China’s biggest ecommerce player Alibaba Group Holding and its affiliate Ant Financial Services are currently major shareholders of India’s most valued startup, Paytm, after a US$177 million deal in 2017 to boost their combined stake in the e-wallet platform – which is now worth US$16 billion – to 38%.

But the relationship between Alibaba and Paytm through Paytm First Games, a gaming joint venture between Paytm and Alibaba, may become problematic if it is enabling FDI without government approval, gaming research firm Niko Partners said in a report last week. The Chinese tech giant may also face competition for greater investment by other shareholders such as Japan’s Softbank Group, India’s One97 Communications and American conglomerate Berkshire Hathaway, Niko added.

Similarly, Chinese internet giant Tencent Holdings’ majority stake in India’s first billion-dollar gaming company, Dream11, could be threatened by the new measures, according to Niko.

“Any further investments by Tencent in the company would be under scrutiny by the government [which would] potentially provide opportunity to the other stakeholders, such as Kaalari Capital, Think Investments, and Multiples Alternate Asset Management, to acquire more equity and thereby replace Tencent as the majority share holder,” Niko said.

Alibaba, Paytm, Tencent and Dream11 did not immediately respond to requests for comment for this story. Alibaba owns the South China Morning Post.

However, analysts said that Indian tech startups will suffer more from the new measures than Chinese tech companies.

“Chinese investment access to India and many other Western markets will be curbed, but their access to Southeast Asia and African markets will still be available going forward,” said Ujas Shah, another analyst at the EIU.

On the other hand, Indian startups will struggle to find alternative funding sources as the global economy goes into a recession, Shah said, adding that while India has emergency funds to help startups withstand the impact in the short term, he expects the valuation of Indian startups to drop as a result.

“Startups require Chinese investors not only because of the money but also because of their technical expertise, and that too will leave a void right now,” Shah added.

“Without Chinese money, we believe that the rest of the world or India itself will not have enough money to fill the void,” Yu said.

Wootliff said that India’s close scrutiny over Chinese investment is likely to persist, even after the outbreak is over.

“This is in line with a global trend that we are seeing that all the countries are looking to get control over the digital infrastructure that they have,” he said. “They are concerned that rival countries may be trying to take advantage of their control of their digital assets.”

But Shah said that the Indian government, as wary as it is, is also acutely aware that it would be impossible to cut off Chinese investment completely. India is working on a fast-track program that can get Chinese investment approved in a week or two, according to a Reuters report last month.

“They do need new Chinese investors to come in and invest in startups,” Shah said.

(Abacus is a unit of the South China Morning Post.)