The government has amended the Foreign Exchange Management Act to curb investments from countries with which it has a hostile relationship- the likes of which include countries like Pakistan and China. With the new amendment in place, any Indian start-up, irrespective of their growth stage or their business field will now have to get their funds from neighbouring countries like China approved from the nodal ministry.

Dynamics of the new amendment

The fresh amendment in FEMA notification came within a week after the Indian Government fortified its FDI (Foreign Direct Investment) policy by making a Governmental nod mandatory for all foreign investment flow from neighbouring countries.

This amendment comes in place after China has been accused of exercising predatory measures to acquire distressed assets in various sectors all over the world, especially from those companies whose revenues have plummeted drastically in the wake of the COVID-19 pandemic.

What does it mean for Indian startups?

Indian startups, including unicorn companies like Ola, Byju's, MMT, Zomato, BigBasket and Swiggy, have all pooled in capital resources from Chinese investors in the past. The companies will now face severe repercussions when it comes to future fundraising rounds. For companies that have Chinese investors, raising investment in the future will be subject to scrutiny from the Government.

      Experts, however, pointed out that the main problem will lie when a situation of a buyout or a change in control when a substantial investment will be made to replenish lowered valuations of the company arises.

Before the recent amendment, Chinese investors looking to purchase stakes or equity shares in a company took the "automatic route", which was devoid of any monitors from the Central Government. However, the new fortifications in place will now make it a mandate for startups to receive approval from the Government before the green signal is given.

FEMA amendment has also stated that “beneficial ownership” by investors from countries whom we share our borders with, will also be subject to scrutiny. However, the amendment has not cleared the limiting ambit.

Conclusion

This amendment is a clear swing towards the predatory tendencies of Chinese investments. Even if a VC firm is not registered in China but the owners are of Chinese origin will undergo a supervision process from the Government before the approval nod is given.

This will impact the startups reliant on Chinese investment in the long run, but at the same time- it will prevent Chinese VC firms from exercising their poaching tendencies on companies with depressed valuations.