India’s New FDI Rules Could Derail Indian Startup Economy

India’s New FDI Rules Could Derail Indian Startup Economy

SUMMARY

With over $10 Bn planned Chinese investments, will the latest FDI rule backfire given the state of the economy?

FDI aims to bring in new technology as well as capital so the policy should be structured accordingly, said former FinMin official Subhash Chandra Garg

At least 81 Chinese investors have invested in 144 Indian startups in the last six years as per DataLabs by Inc42 analysis

‘Minimum government, maximum governance.’“Our government has already undertaken substantive reforms in FDI policy in the last two years. More than 90% of the total FDI inflows are now through the automatic route.”If we look at India numbers, about 81 Chinese investors have invested in 144 Indian startups in the last six years, as per a recent study concluded by DataLabs by Inc42. While the majority of investors are based out of China, 26 are from Hong Kong remaining few are from Taiwan.“Chinese FDI has been coming quite aggressively in the sectors where Make In India policy encouraged setting up of manufacturing facilities in India and in the venture capital-backed startups. These sectors are likely to suffer,” Garg added.However, it’s not only about the firms, but Chinese LPs do also have investments in global funds which have further routed its investments in India through some other countries. In such cases, is it possible for the government to trace the ultimate beneficiary?“For FDI investments originating from private equity, it should not be difficult to disclose who the ultimate beneficiaries are. There are well laid out systems in the country to report on and scrutinise ultimate beneficiaries in FDI.”“I think eventually, the industry will work with the government to come up with a structure which does not impact or impede the deal making ability of businesses and investors in India in general. I would sense the move as that the government is being more cautious. However, we need to have a structure which would work for all.”FDI meets two significant needs of India. One, it brings new technology along. Second, it meets the capital deficit. The FDI policy should be structured to serve these two objectives clearly.According to DataLabs, between 2014 and 2019, over 234 funding deals occurred with Chinese participation (either directly or indirectly). Of which 49% were in the growth stage and 39% at the late-stage.   

Even before Narendra Modi became the prime minister of India, he had announced this as his mantra for making policies. However, despite creating a slew of task forces, working groups across the ministries, drafts, barring few instances, the government has failed to meet the policy requirements at large and their transparent implementation across the sectors. This includes drones, ecommerce, data privacy, crypto, foreign direct investments and so on.

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