To avoid hostile takeovers amid COVID-19, India mandates approvals on Chinese investments

“The government has reviewed the extant foreign direct investment policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic,” the trade ministry said in a note.

The new rule will also be applicable to “the transfer of ownership of any existing or future foreign direct investment in an entity in India, directly or indirectly,” it added.

Prior to this move, the Indian government, like most others, only intervened in deals occurring in atomic energy, defense, and space industries that it currently prohibits. Watchdogs in several markets also typically intervene in major foreign investments that pose competitive disadvantage to other local players in a category.

Bangalore-based lawyer Nikhil Narendran told TechCrunch that the move appears to be aimed at China. “There has been a growing concern across the globe that Chinese companies are buying cheap, distressed asset. Government may be thinking that if this is allowed to continue, it may raise some security concerns,” he said.

India appears to be following efforts from other countries such as Australia that have either tightened their foreign direct investment policies in recent weeks or are exploring similar options, he said.

Chinese giants Alibaba and Tencent have emerged as some of the biggest investors in Indian startups in recent years. Over a dozen additional firms and venture funds in China have stepped up their efforts in scouting deals in India.

Some of India’s biggest startups including financial services firm Paytm, e-commerce giant Flipkart, social media operator ShareChat, and food delivery firm Zomato are backed by Chinese VCs.

HDFC, India’s biggest bank, said earlier this month that Bank of China had raised its stake in the mortgage lender by over 1%.

Rahul Gandhi, the former head of political party Indian Nation Congress, urged the ruling government earlier this month to take measures to prevent “foreign interests from taking control of any Indian corporate at this time of national crisis.”

The revision in policy comes at a time when major investors in India have cautioned local startups to prepare for a tough period ahead. Earlier this month, they told startup founders that raising fresh capital is likely be more challenging than ever for the next few months.

Recent data from research firm Tracxn showed that Indian startups have already started to face the pressure.

Local startups participated in 79 deals to raise $496 million in March, down from $2.86 billion that they raised across 104 deals in February and $1.24 billion they raised from 93 deals in January this year, according to Tracxn. In March last year, Indian startups had raised $2.1 billion across 153 deals, the firm said.

India ordered a nationwide lockdown last month in a bid to curtail the spread of the coronavirus disease. But the move, as in other markets, has come at a cost. Millions of businesses and startups are facing severe disruptions.

Late last month, more than 100 prominent startups, VC funds, and industry bodies requested New Delhi to provide them with a relief fund to combat the disruption.