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Published on: Jan. 12, 2021, 5:02 p.m.
Will the fall of Alibaba affect Indian start-ups?
  • The Indian companies where Alibaba Group has invested include digital payments platform Paytm, online food delivery platform Zomato and BigBasket

By Rakesh Joshi. Executive Editor, Business India

For Indian start-ups, the downsizing of Jack Ma, the charismatic founder of Alibaba Group, the world’s largest e-retailer, by the Chinese authorities is bad news. According to conservative estimates, Alibaba and its affiliates Alibaba Capital Partners and Ant Group (earlier known as Ant Financial) have invested more than $2 billion in Indian companies since 2015. More was in the offing.

In the last five years, Chinese investors, including another targeted tech company Tencent, have overall poured in over $5.7 billion into the Indian start-up ecosystem, of which $641 million came in 2019 alone. It is feared that the growing Chinese scrutiny and pressure on its corporate sector to function as adjuncts of the Chinese Communist Party could lead to a funding roadblock for Indian start-ups, which have relied on Chinese investment in the past.

These start-ups will have to now look for alternative funding sources. The initial effects of the roadblock were evident, when food delivery unicorn Zomato did not receive $50 million from Ant Group, as part of its $150 million round announced earlier. It had to turn to Singapore’s sovereign wealth fund Temasek instead.

The companies where Alibaba Group has invested in through its fintech ventures include digital payments platform Paytm, online food delivery platform Zomato and BigBasket. Tencent has invested in Swiggy, one of the frontrunners in food delivery and local services.

India is home to 30 unicorn companies, 18 of which are at least partly backed by Chinese investors. As India’s economy continues to digitise, Indian tech start-ups have increasingly looked to Chinese investors for venture capital funding, as well as for internet industry expertise. Even the smallest of Indian start-ups has sought to catch the attention of Alibaba -- such was the charismatic pull of its owner and his eye for spotting talent.

India is the second largest market globally for Alibaba.com, the business-to-business arm of the Alibaba Group, next only to China. The business-to-business subsidiary launched an online platform in 2008 to provide Indian small and medium enterprises (SMEs) access to global counterparts.

The company has 4.5 million registered users from India. MEs in India can also avail assistance in terms of financing, logistics (domestic and cross-border), inspections and certifications, technology and SME trade-linked education on this platform. The Chinese company has partnered with enterprises, such as ICICI Bank, Kotak Mahindra Bank, Crisil Rating, Tally, Capital Float, Jeena, SGS and Mypacco to help Indian SMEs expand their business. Jack Ma was once reportedly in talks with Mukesh Ambani of Reliance Industries and Cyrus Mistry, who then headed the Tata Group. But a deal didn’t work out in both cases. 

Alibaba’s status as an angel investor was evident when rumours swirled in December 2019 about the Ant Group considering the sale of its 30 per cent stake in Paytm. There was a flutter in domestic fintech circles and the home-grown digital payments major had to quickly refute the report. Ant Group later also stepped in to say that the report is based on ‘false information’. Earlier too, that the group has put on hold plans to invest in Indian companies amid the military face-off between the two nations in Ladakh. Now, the disappearing act by Ma has left top-notch Indian digital firms flummoxed. 

In addition to internet giants like Alibaba and Tencent, Chinese venture capital funds like Shunwei Capital and Morningside Venture have been actively investing in India’s developing tech ecosystem. In December 2019, Chinese insurance giant Ping An made its first investment in India, participating in CarDekho’s $70 million Series D Round. 

When the Modi government imposed a ban on as many as 59 Chinese apps in the wake of rising Indo-China border tension in Ladakh, citing threat to the country’s security and user privacy, many Indian users were left wondering if the ban would also affect Alibaba. TikTok, ShareIt, WeChat and UC Browser are amongst the most popular apps in the country that got banned. UC Browser is an app developed by the Alibaba-backed mobile internet company called UC Web. 

Deals on the backburner

In any case, Chinese investments in Indian start-ups have fallen this year, following changes in foreign direct investment (FDI) rules that made prior government approval mandatory for investments from countries that share a land border with India. Chinese investors had invested $166 million in Indian start-ups between January and July, as against $197 million in the year-ago period, according to data from deals analysis firm Venture Intelligence.

“Chinese investors had been looking at companies in the consumer internet space, as well as some elements of deep tech, and wanted to close those deals as soon as possible,” says Siddarth Pai, founding partner, 3one4 Capital, the Bengaluru-based early stage venture capital fund. “After the Press Note 3 announcement was made, a number of these deals got put on the backburner because of the uncertainty generated by it”.

Some start-up founders believe that India shouldn’t stop Chinese money from coming into the country. “Indian founders need money as well as their (Chinese VCs) know-how of the industry. Instead of ‘blocking’ investment from China, India should pass a law that limits their shareholding in an Indian company,” says one of them, on condition of anonymity.

The problem is not restricted to Chinese authorities putting the squeeze on businessmen wanting to invest in Indian companies or the new FDI rules that call for government approval. Even American and European investors, who are investing in India, are facing hurdles because several of them have raised some amount of money from Chinese firms.

The uncertainty will continue. In a perceptive analysis of the annual Central Economic Work Conference of the Chinese Communist Party recently held in Beijing to plan for 2021-22, India’s former foreign secretary and China-watcher Shyam Saran points out that a key element of deliberations was ‘anti-monopoly suppression’ and ‘prevention of disorderly capital expansion’. This is directed against Chinese corporate sector and is the reverse side of promoting SoE (state-owned enterprises) champions.

This policy, according to Saran, should be seen in the light of action taken against Alibaba and Tencent. Their rapid expansion and pervasive influence is being seen as a threat to the authority of CPC. Moreover, Alibaba’s foray into fintech beyond its payments business is also seen as a rival to plans of the Chinese state to introduce a sovereign digital currency and a national payment system with Chinese banks as intermediaries.

“The message is clear: China’s private sector must operate under CPC leadership and supervision,” says the former diplomat. “This in whatever deals may be contracted by a foreign enterprise with a Chinese entity, the Chinese state, more particularly the CPC, is also an interested party”. 

Jack Ma’s fallout with the Chinese government started when the Shanghai Stock Exchange in November postponed Ant Group’s listing at $37 billion, which would have been the biggest IPO ever. The Shanghai Stock Exchange cited regulatory changes as the reason behind this sudden suspension. Alibaba shares plunged by almost 10 per cent in Hong Kong after the news, as Ma lost more than $3 billion in his net worth. Since then, Ma has been nearly untraceable. The provocation seems to have been Ma’s criticism of China’s regulators at a conference in Shanghai. He accused authorities of stifling innovation and blasted the country’s banks for having a ‘pawn shop’ mentality. The retaliation was swift.

Later, on 26 December, the People’s Bank of China, the country’s central bank, ‘summoned Ant Group for regulatory talks, announcing a sweeping plan for the fintech firm to ‘rectify’ its regulatory violations’. The banking authority has laid out a five-point compliance agenda for Ant Group. The agenda is that Ant Group should return to its roots in payments and bring more transparency to transactions.

Ant under the Dragon

The group is expected to ‘obtain the necessary licences for its credit businesses and protect user data privacy and establish a financial holding company and ensure it holds sufficient capital’. The Ant Group must also ‘revamp its credit, insurance, wealth management and other financial businesses according to the law and step up compliance for its securities business’. Ant said it has established an internal ‘rectification workforce’ to work on all the regulatory requirements.

China’s top market watchdog has also begun investigation into alleged anti-competition practices by Alibaba. The State Administration for Market Regulation started investigation into alleged anti-competition practices by the e-commerce giant, as Beijing tightened control of an expanding internet. In a brief note, the State Administration for Market Regulation said that it is investigating Alibaba over its ‘choosing one from two’ policy. As part of this policy, merchants are forced to sell exclusively on Alibaba e-commerce platforms and skip rivals like JD.com.

On its part, Alibaba maintained a brave face and said will actively co-operate with the regulators on the investigation, adding that ‘business operations remain normal’. Western observers say that the one overall message Beijing is really sending is that tech entrepreneurs may be the most glamorous, the most publicly favourable face that China has so far shown to the world, but there is no one individual, no one company bigger than the Chinese Communist Party.

A former English teacher with humble beginnings, Ma has long personified China’s economic prosperity and entrepreneurial grit. He built Alibaba into a $500 billion tech empire and amassed a personal fortune of some $50 billion. But his apparent eclipse follows the downfall of superstar actress Fan Bingbing, who abruptly dropped out of sight in 2018, before reappearing a year later to apologise for a tax evasion scandal. Also, real-estate tycoon Ren Zhiqiang disappeared for several months last year after he allegedly criticised President Xi Jinping’s handling of the corona-virus pandemic. He was eventually jailed for 18 years on corruption charges.

Western observers fear that as a result of these moves, the ability of a figure like Jack Ma to speak out will be harder. While this will actually create a further problem for China’s desire to generate soft power, as nobody really takes seriously figures from any country who go around the world simply spouting the government line, it possibly doesn’t figure high on Xi Jinping’s drive of total domination. 

In case the CPC starts controlling the purse-strings of its businessmen, the shift is likely to mean greater interest in fundraising from US investors, which are also active in India’s tech sector. US-based funds have been investing in Indian tech start-ups since 2010 and have forged long-term relationships with people in the industry. In fact, many Chinese VCs prefer to invest in an Indian start-up, only if there’s an American or Indian fund joining the round, already familiar with the founders or sector.

Also, as sector experts say, though Chinese funds have spent seven odd years in India, they have not been able to create an intimacy with Indian founders and VCs as much as US-based funds. A lot of American funds like Sequoia Capital and Accel have hired a lot of people in India and have created founder pools. All the companies that have been waiting for follow-on rounds from China would now have to approach US and Indian funds, which have been collecting funding from limited and general partners, as well as family offices that have started showing interest in tech start-ups.

It’s not that capital will dry up. India has a capital pool coming in from the US and European funds, while even South Korean and Japanese funds are interested in this market. The Indian start-up ecosystem will require more funds this year than ever before, as the country has added a major number of start-ups in the first half of 2020.

As many as 551 companies were incorporated in H1, as compared to 460 firms in the corresponding period last year, according to a report by business intelligence firm Tracxn. Also, “post-Covid-19, when businesses would start looking up, start-ups would be in extra need of money,” points out Mahendra Swarup, founder & CEO, Venture Gurukool, an early-stage fund.

As for the Chinese, there always is a big question mark. However, it is unlikely that Chinese investments will exit suddenly, given the logistical difficulties of unwinding some of the country’s biggest tech deals in a post-pandemic recovery cycle. As for fresh investments, they will wait for things to smoothen out, geopolitical condition to get better, public sentiment to get better and for the CPC to recalibrate its next set of global moves. As for Alibaba, it is still China’s biggest employer. China ultimately wants to win the tech war, and it needs Alibaba to do it. Who knows? Once it’s shaved down to size a bit, Alibaba may emerge as a cherished national champion. But there is always a big if! 

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