Chinese firms wait for further clarifications, may reroute capital to other geographies

New Delhi: Chinese venture capital investors are turning increasingly anxious about India’s new foreign direct investment policy, after the government last month mandated that all investments from countries sharing a land border with India will require its prior approval.

The finance ministry notified the change in policy under the Foreign Exchange Management Act (FEMA) on April 22.

Two investors told ET that deal flows into the country have already been impacted. Some investors have even withdrawn term sheets that were on the table, the investors said on condition of anonymity, adding that they were waiting for clarifications from the government on the policy tweak. The finance ministry notified the change in policy under the Foreign Exchange Management Act (FEMA) on April 22.

Over the last few years, prominent venture capital firms such as Shunwei Capital, Fosun RZ Capital, CDH Investments, Hillhouse Capital and Morningside Ventures have set up their local offices and hired investment professionals to scout for deals, across stages, in Asia’s third-largest economy, where they have emerged as the largest purveyors of capital.

Aside of VCs, the big money comes from Chinese internet behemoths such as Alibaba Group and Tencent Holdings, which have invested millions of dollars in quite a few of India’s most richly valued startups, including Paytm, Ola, Byju’s and Dream11. Their investments — both new and follow on — will now come under the government’s scanner.

ET reached out to multiple Chinese venture capital firms that have invested in the Indian startup ecosystem, either directly or through intermediaries. They declined to comment on record, saying they were waiting for greater clarity from the country’s policymakers. A senior executive at a Chinese VC fund in India said: “There are more questions than answers at this point…A few investors have already rolled back their term sheets because of the uncertainties. How do we pitch deals to our LPs (Limited Partners) or our investment committees?”

The venture capitalists are calling for a more investment-friendly landscape and have pointed out that if the situation does not change or if deals are not fast-tracked, capital could be diverted to other emerging economies. “Countries like Indonesia and the Philippines have already been investment destinations for us, but there could be a greater focus on them in the medium to long-term. This policy, so far, seems to be quite counter-intuitive,” a second investor told ET.

Chinese investors have poured in close to $6 billion into India’s digital ecosystem over the last two years, as they looked to park capital in the world’s fastest growing, yet largely untapped, consumer market. Out of India’s 30 unicorns — privately held companies valued at $1 billion and upwards — at least 18 ventures count investors from the Middle Kingdom as part of their overall shareholding.

The move to place restrictions on Chinese VCs comes at a time when venture capital investments in Indian startups have plunged to $2.2 billion in the first quarter of calendar year 2020, according to the latest edition of KPMG’s Venture Pulse report.