‘Stealth investment’: Chinese money finds its way into Indian tech as IPOs boom
- India’s tech scene is flourishing after Covid-19 lockdowns led to greater use of digital services, with investors pouring US$10 billion into start-ups this year
- While investors such as Softbank dominate, Chinese investors are also returning via Hong Kong, despite New Delhi’s FDI rules and deteriorating bilateral relations
Meanwhile, US investors such as New York-headquartered Tiger Global have sealed over two dozen deals this year.
Softbank’s US$2 billion infusion into India this year has gone to a mix of start-ups, from food delivery firms to fintech players to the online insurance marketplace, as the country’s tech industry boomed after Covid-19 lockdowns fuelled greater use of digital services.
“The times are unprecedented in the amount of capital available,” said Yashish Dahiya, CEO of the online insurance marketplace Policybazaar, which is backed by Softbank and has just filed for an initial public offering (IPO) that could raise as much as 60.18 billion rupees (US$809 million).
Indian food delivery start-up Swiggy last month announced it was the latest beneficiary of Softbank funding, with one-third of its recent US$1.25 billion fundraising round coming from the Japanese venture capitalist.
There are also signs that Chinese money is making a comeback in the Indian tech scene after a dramatic drop last year.
The flow of funds from Hong Kong – often seen as a proxy route for investments from mainland China – plunged from US$168 million in 2018 to a mere US$2 million last year, according to Venture Intelligence, after New Delhi announced rules last May aimed at preventing Chinese firms from buying up weaker Indian companies during the Covid-19 pandemic.
But in the first six months of this year, funds from Hong Kong rose to US$80 million.
“The [Chinese] capital is finding its way into India. It may not be US$8 billion or an all-time high. But pockets of capital are still flowing from China in the form of ECBs [external commercial borrowing] too,” said Alok Sonker, partner at the law firm Krishnamurthy & Co, which advises companies on the legalities of foreign direct investment (FDI).
ECBs, an emergency funding mechanism, are loans given to Indian borrowers in foreign currency, and the latest curbs on FDI do not apply to them.
“Some of them are doing stealth investments wherein they’re selling it to someone whom they can trust,” said Sonker.
“The idea is when regulatory restrictions are lowered, they will have a strategic interest and stake in that business, and buyback. Those kinds of structures are being worked at depending upon the size, end, and intent of the business. They are exploring stealthy opportunities,” he added.
Sonker added that most of the outlay from Chinese investors was strategic and not necessarily intended for financial benefits. Unlike their Western counterparts, the Chinese investors want total control of the company or sector they have invested in and are not just looking at monetary profits.
For example, they might not set up a joint venture with an Indian firm but would want only a wholly owned subsidiary – an easy pathway for hostile takeovers or wielding complete influence.
“When Tencent was writing a large cheque for [Indian sports fantasy platform] Dream11, they were looking at a potential acquisition target for their expansionist strategy in India,” Sonker said.
Still, a start-up founder from the southern city of Bangalore said there were still concerns about the repercussions for Indian tech firms if they accepted Chinese investment.
“We dread touching Chinese money given the regulatory sword hanging over our heads. It’s an unnecessary risk and headache which attracts added scrutiny,” said the founder, who declined to be identified due to the sensitivity of the investor community.
Analysts say that while Indian start-ups cannot fully overlook the cash flow from China, they are forced to forage in alternate avenues.
“Chinese money does remain crucial to the Indian start-up ecosystem. Almost all major Indian unicorns are backed by a Chinese company or another. But, they are now seeking funds from elsewhere because of hard policy intervention” said Aurojyoti Bose, lead analyst at data analytics firm GlobalData.
“Still, there are exceptions. Consider the case of Jio. When it raised about US$20 billion between April and July last year, there was not a single Chinese name,” Bose pointed out.
Jio Platforms, the digital offering of Mukesh Ambani-owned Reliance, attracted huge names such as Google and Facebook during its fundraising spree last year.
And amid the bullishness over India’s tech scene, start-ups have also rushed to list on the stock market, partly in the hope that the ongoing regulatory crackdown by Beijing on Chinese tech firms could make global investors more receptive to pumping money into Indian tech companies.
Bloomberg reported that more than a dozen start ups are preparing to go for an IPO in the next 18 months.
Food-delivery services company Zomato raised a record US$1.3 billion in its blockbuster IPO in late July. The demand was so high that for each share the loss-making company wanted to sell it got more than 38 applications and the stock has risen by roughly 80 per cent since its debut. Zomato is backed by Alibaba – which owns the South China Morning Post – though it has pared back its stake due to a growing anti-China investment climate.
Nykaa, India’s top e-commerce site for beauty products, which is endorsed by Bollywood stars and attracts a young market, has also filed preliminary documents for an IPO, Bloomberg reported.
Digital payments platform Paytm, also backed by Alibaba, and fintech firm MobiKwik have filed for IPOs. Meanwhile, the Walmart-owned Flipkart and logistics company Delhivery – both backed by Softbank – are expected to go public too.
“The IPOs are testament to good companies creating market-leading positions in which the public market can see the value and fast-growing profits,” said Dahiya, Policybazaar’s CEO.
With the companies enjoying mega-funding rounds, record IPOs and new unicorns, the trend is expected to continue for the coming months, analysts say – at least and until there is a major adverse policy intervention from the government.
Rather than a handful of private investors who could reap profits from the start-ups, the public could also invest in lucrative firms and in turn help pump more money into these companies, Dahiya added.
“Eventually I call it shared public value understanding rather than one which earlier existed in few private investors only. This is a good sign and now these companies will be responsible and capitalised to achieve their goals including financial ones,” he said.