#TheInc42Show: What Can Govt Do To Incentivise Investments Amid FDI Restrictions?

A major shockwave has hit the Indian startup ecosystem amid the pandemic-driven recession and crisis. The government has introduced and notified changes in the foreign direct investment rules, putting restrictions on investments from neighbouring countries— including China.

To put it in perspective, Chinese investments in India has grown from $1.6 Bn in 2014 to over $8 Bn in 2017. The FDI figures till now stand at $26 Bn including transferred and planned investments, according to Beijing’s ministry of commerce with a significant portion of this going into Indian startups. Chinese investments in India’s startup ecosystem were also reported to have risen to $3.9 Bn in 2019, up from around $2 Bn in the previous year.

Further in the context of segment-wise deals between 2014-2019, more than 234 funding deals have been done with Chinese investor participation of which, 49% or 115 were in the growth stage and 39% or 91 were in the late stage. Hence, undoubtedly, China contributes a significant portion to Indian startup funding. Therefore, the new FDI regulations have raised questions about the impact  along with the finer details of the matter.

To discuss the same, we hosted the first edition of “The Inc42 Show”, where Inc42 CEO Vaibhav Vardhan moderated a session featuring Siddarth Pai, founding partner of 3one4 Capital; Girish Vanvari, founder, Transaction Square – a tax, regulatory and business advisory firm; Deena Jacob, cofounder and CFO of neobanking startup Open and Amit Bhandari, an energy studies fellow at Gateway House, Indian Council on Global Relations.

From the discussions, it was clear that the impact is set to be huge and even though India is under the scrutiny of several new investors, the government also needs to intervene with supportive measures to drive Indian and foreign investments to manage the deficit.

Hence, the panellists had a wishlist from the government to fill up the vacuum which has been created with these restrictions.

To begin with, Bhandari said that one of the issues that need to be clarified is the distinction between pure venture funds based in Hong Kong and mainland China companies which often act as de-facto arms of the Chinese state.

Bhandari also noted that beneficial ownership clauses need to be clarified for each investment so startups are not caught unaware about how much stake or equity would be under scrutiny. In simple terms, it needs to be clear whether the government will track each and every investment or it would be based on a stake threshold, crossing which would require government scrutiny?

Jacob and Bhandari noted that the government needs to differentiate sector-based investments as well, given that the sectors like media, fintech etc are sensitive, while others are not sensitive.

Jacob said that the procedure that needs to be followed and the clarity on timelines for approval needs to be set. Jacob also said for “clarity on the kind of internal systems to look at other sources of capital especially within India.”

Pai said that uncertainty is the enemy of capital and the government needs to reduce that, reiterating for clarity on beneficial ownership threshold, sectors and timelines.

He emphasised, “The government needs to offer a lifeline to startups, stop discriminating entrepreneurs when it comes to income tax harassment, we actually need policies which are conducive for investments into them. Tax parity with the listed space will bridge the disparity between startups and listed entities and remove tax as consideration for investments into startups.”

Pai further suggested that the government can incentivise investments in the startup ecosystem by creating conditions conducive for larger domestic investors like life insurance companies, University endowments etc to invest into AIFs and startups.