Govt nod likely for funding from Chinese investors below 10% stake

A majority of the 100 applications pending since April are for non-sensitive sectors

Many deals involving Chinese investors, especially in technology and start-up  firms, could possibly get the go-ahead soon. According to sources, the Union government is considering cases where Chinese investors would pick up less than 10 per cent stake. 

“Most of the applications are under consideration and certain queries and clarifications are being raised with the legal representatives of companies,” said a government official in the know. 

The approvals are expected to come in a few weeks, following the Ministry of Home Affairs clearance, the official said. 

Funding-related applications of many start-ups have been pending due to the altered foreign direct investment (FDI) norms for Chinese companies planning to invest in India. About 100 applications from Chinese investors are stuck with ministries and departments since April. 

“Majority of these applications are for non-sensitive sectors. Besides start-ups, Chinese players have also shown interest in the automobile space. Two automobile manufacturers’ applications are being reviewed,” the official pointed out.

WAITING FOR CAPITAL

• Non-sensitive sectors, such as electronics, electrical equipment, book printing, and automobiles, top the list in attracting investment from China 
• Start-ups and tech firms, such as Zomato, Paytm, e-grocer Bigbasket, Byju’s, Ola, Oyo, received substantial funds from China
• Most of them are affected by Covid-19 and now depend on fresh capital infusion 
• The change in FDI rules was mainly aimed at restricting investments from China

The government is scrutinising the applications to ensure investments are fair and Indian promoters do not lose control of their firms, the official explained. 

“As the reason for introduction of Press Note 3 is to prevent hostile takeover in case of falling valuations of Indian companies due to Covid-19, and since anything below 10 per cent would hardly be considered as hostile takeover from the government perspective, it may be comfortable approving such cases,” said Atul Pandey, partner, Khaitan & Co.

The government is evaluating profiles of companies along with their previous investments to be on the right side of the law. 

Food delivery aggregator Zomato is among the leading start-ups facing difficulty in receiving a second tranche of $100 million equity capital (about 3 per cent) from the Ant Group-an affiliate of Chinese e-commerce major Alibaba. 

Ant has been an investor in Zomato since 2018 when it picked up a 14.7 per cent stake in the company. The Chinese group raised its holding to 23 per cent later that year.

Such cases are a bit tricky as Ant already owns a significant stake in the food aggregator, an analyst pointed out. Going by the definition of beneficial ownership, Ant Group is already controlling the company, even as the fresh funding would be for an additional 3 per cent stake only, he said. 

The government has clarified that the new FDI norms are applicable to fresh funding, and not retrospectively. The government had on April 22 issued a notification under the Foreign Exchange Management Act, which required investments originating from seven neighbouring countries including China, to seek prior approval of the government. 

With border tension escalating, the government completely stopped pursuing investments files, particularly from China and Hong Kong. 

The changes in the rule had left start-ups with unanswered questions on the beneficial ownership of foreign investment arms looking to invest in India. 

The government also formed a committee, to vet each of the proposals coming from foreign counterparts, particularly China.