To avoid hostile takeovers amid COVID-19, India mandates approvals on Chinese investments

Chinese investors, who have poured about $6 billion into Indian startups in the last two years, will be subjected to tougher scrutiny for their future investments in the world's second largest internet market.

India amended its foreign direct investment policy on Saturday to require all neighboring nations with which it shares a boundary to seek approval from New Delhi for their future deals in the country. Previously, only Pakistan and Bangladesh were subjected to this requirement.

The nation's Department of Promotion of Industry and Internal Trade said it was taking this measure to "curb the opportunistic takeover" of Indian firms that are grappling with challenges due to the coronavirus crises.

"The government has reviewed the extant foreign direct investment policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic," the trade ministry said in a note.

The new rule will also be applicable to "the transfer of ownership of any existing or future foreign direct investment in an entity in India, directly or indirectly," it added.

Prior to this move, the Indian government, like most others, only intervened in deals occurring in atomic energy, defense, and space industries that it currently prohibits. Watchdogs in several markets also typically intervene in major foreign investments that pose competitive disadvantage to other local players in a category.

Several investors and analysts said the move appears to be aimed at China as Nepal, Afghanistan, Bhutan, and Sri Lanka have shown little interest in getting stakes in Indian businesses.

"There has been a growing concern across the globe that Chinese companies are buying cheap, distressed asset. Government may be thinking that if this is allowed to continue, it may raise some security concerns," Bangalore-based lawyer Nikhil Narendran told TechCrunch.

India appears to be following efforts from other countries such as Australia and Germany that have either tightened their foreign direct investment policies in recent weeks or are exploring similar options, he said.

Chinese giants Alibaba and Tencent have emerged as some of the biggest investors in Indian startups in recent years. Over a dozen additional firms and venture funds in China have stepped up their efforts in scouting deals in India.

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India has $60B trade deficit a year with China pic.twitter.com/hUKm89VPVE

- Rajesh Sawhney (@rajeshsawhney) April 17, 2020

Some of India's biggest startups including financial services firm Paytm, e-commerce giant Flipkart, social media operator ShareChat, and food delivery firm Zomato are backed by Chinese VCs.

HDFC, India's biggest bank, said earlier this month that Bank of China had raised its stake in the mortgage lender by over 1%.

Rahul Gandhi, the former head of political party Indian Nation Congress, urged the ruling government earlier this month to take measures to prevent "foreign interests from taking control of any Indian corporate at this time of national crisis."

The revision in policy comes at a time when major investors in India have cautioned local startups to prepare for a tough period ahead. Earlier this month, they told startup founders that raising fresh capital is likely be more challenging than ever for the next few months.

Recent data from research firm Tracxn showed that Indian startups have already started to face the pressure.

Local startups participated in 79 deals to raise $496 million in March, down from $2.86 billion that they raised across 104 deals in February and $1.24 billion they raised from 93 deals in January this year, according to Tracxn. In March last year, Indian startups had raised $2.1 billion across 153 deals, the firm said.

India ordered a nationwide lockdown last month in a bid to curtail the spread of the coronavirus disease. But the move, as in other markets, has come at a cost. Millions of businesses and startups are facing severe disruptions.

Late last month, more than 100 prominent startups, VC funds, and industry bodies requested New Delhi to provide them with a relief fund to combat the disruption.