The stringent foreign direct investment (FDI) rules newly framed by India is going to change the way Indian startups raise funds from China and the government’s amended FEMA rules look all set to spoil the party for startups and stakeholders.
The latest changes are aimed at India’s neighbouring or border sharing countries and particularly Chinese investments in India. By the new rules, startups that were planning to get funds from China will now have to take permission from the respective nodal ministry in India.
This means a foodtech startup seeking funds from Chinese investors will have to take permission from India’s Ministry of Food and Agriculture while a healthcare startup will have to get approval from the Ministry of Health and Family Welfare. The same goes for startups across segments – ride-hailing, fintech, edtech, hospitality, and so on.
Even the existing portfolios of China-based investors will need similar permission if they raise funds in the future, said a Mint report quoting legal experts.
So far, startups have been raising funds via the automatic route that doesn’t require special permission from the Indian government.
However, the latest FDI rule will become a hindrance for some of the biggest startups that have already raised funds from Chinese companies and investors such as Paytm, Ola, Zomato, Swiggy, BigBasket, Byju’s, Delhivery, Dream11, MakeMyTrip, Hike, Policybazaar, Rivigo, and Udaan.
Notably, if any Indian company raises capital from a fund that is not based in China but its investors are Chinese nationals, then too the same rule will apply. However, the government did not clarify what if in case of any investment from a fund whose limited partners are Chinese citizens.
Entrackr has reached out for comments from legal experts and we’ll update the story when they do.
On April 18, the Indian government introduced the amended FDI rules to counter investments primarily from Chinese companies and investors who were trying to pick up stakes in Indian companies taking advantage of the sudden dip in the stock market.
The Chinese government has called India’s move a violation of WTO’s principles of non-discrimination and against the spirit of free and fair trade.