India-China spat starting to impact domestic unicorns, Chinese investors

Experts said Chinese investments in Indian unicorns including Paytm, Byju's, Ola, BigBasket, Dream11, and Swiggy may drop sharply through investors such as Alibaba, Tencent and Xiaomi

The Sino-India tensions including the Chinese app-ban and the changes in the foreign direct investment norms and pre-clearance mechanisms on investments from China have started showing the signs of impact on Indian unicorn companies and their Chinese investors. 

Ant Group, the payment and finance-focused company of the Chinese e-commerce giant Alibaba, said in its initial public offering (IPO) prospectus at the Hong Kong stock exchange that a change in foreign investment regulation in India led to “further evaluation” of the timing of its additional investment in food delivery start-up Zomato. Ant also said it has "significant influence" over One97 Communications Ltd, which operates Paytm, and holds a 30.33 per cent stake in the Noida-based digital payments firm. Ant also said that it may face challenges in expanding its cross-border businesses and operations, and it may not be able to successfully grow its cross-border payment business.

Experts and industry insiders said that it expected that investment in top companies including Paytm, Byju’s, Ola, BigBasket, Dream11, and Swiggy would drop sharply in the next few months through Chinese investors. These firms have raised capital from top Chinese investors, such as Alibaba, Tencent, and Xiaomi, which are active in the Indian start-up space, and have collectively invested billions of dollars.

Experts said the valuation of Paytm has been pegged at around $16 billion and Ant’s stake in it is worth around $5 billion, which makes it an inevitable part of Paytms’ business.

“Paytm, with Alibaba Group having a little over 30 per cent stake (and it being one of) the major associates, is going to be adversely affected and any further rounds of investments are not likely going to come from China or Chinese investors,” said Salman Waris, managing partner at technology law firm TechLegis Advocates and Solicitors. “Besides that with already such a high stake from Chinese investors it is highly unlikely that any significant investors would want to expose their investments to a company where shots are being called by the Chinese investors, unless Alibaba themself decide to offload their stake. So it is going to be a very tough few years for players like Paytm.”

Paytm is also betting big on financial services and has been making serious inroads in this sector. According to Sumit Kochar, corporate commercial lawyer and transaction advisory partner at Dolce Vita Trustees, Paytm recently started stockbroking business in an endeavour for becoming profitable by the year 2022.

“But if working capital and fundraising issues will come into play in future, the diversification business will get affected due to cash flow (challenges) whilst on the regulatory front there may be further hurdles from regulators like RBI (Reserve Bank of India) which approves FDI inflow and capital markets regulator-- SEBI along with NSE and BSE as well which approves and regulates financial services businesses in India,” said Kochar.

However, another industry source said that Paytm is a “homegrown company”, registered in India, following all the rules and regulations of the country. The person said over the years, the company has tapped global investors from countries such as Japan and the U.S, including  Masayoshi Son-led SoftBank and Warren Buffett's Berkshire Hathaway. The query to  Paytm remained unanswered till the time of going to press.
"We have a strong runway and also continue to witness active interest from new as well as our existing network of investors," said a Zomato spokesperson on Wednesday night.. 

With 59 Chinese apps recently banned by India, including Bytedance's TikTok, Alibaba's UC Browser and Tencent's WeChat, as the government cited security concerns, the country is expected to increase the level of scrutiny of investments coming from China — both directly and indirectly.

“The recent Indian action on Chinese apps was one of the factors, that has led to increased global scrutiny of business practices of China's tech giants. There are also questions about the role of the Chinese Communist Party, and issues of data security, privacy and national security that arise because of that,” said Amit Bhandari, Fellow, energy and environment studies at foreign policy think tank Gateway House. “All this makes business as before scenario difficult. This is also one of the factors explaining why these companies want to list on Hong Kong and Shanghai stock exchanges, rather than any global stock exchange.”

Online gaming company Dream11, which is the Indian Premier League’s (IPL) new title sponsor, is reportedly in talks with several private equity and venture capital firms to raise about Rs 375 crore. According to the sources, the latest funding round is expected to help the Mumbai-based firm to further reduce the stake of existing investors like China’s Tencent.

Though Ant Group in its IPO prospectus filing has not explicitly explained the recent boycott movement or banning of Chinese apps, experts said it has highlighted the concerns about the relationships among China and other Asian countries. “This may result in or intensify potential conflicts in relation to territorial, regional security and trade disputes and consequently, negatively affect its cross-border business,” said Kochar of Dolce Vita Trustees.

Experts said that these factors are forcing Indian unicorns and soonicorns to turn to other investors in other regions including the US, Middle East and Europe.  “The ‘India Digital Story’ is very much alive as is evident from recent investments into the digital ecosystem from North America and the Middle East even during these uncertain times,” said Waris of TechLegis. "Besides, there is a positive interest shown by the European privately held family funds and European sovereign funds that are considering investments into the Indian start-up space.”