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SEBI, Zomato IPO, Chinese Investors, and the Indian Startup Ecosystem

Today, let's talk about SEBI's review of Zomato's DRHP and its concerns and present sentiments of Indian founders towards Chi

Last month, Zomato filed its DRHP, a draft red herring prospectus for its IPO worth over 1.1 billion USD later this year. The food delivery giant will offer equity shares aggregating up to 8,250 crore INR, 1.1 billion USD per the prospectus. Of this, 7,500 crore INR will be a new issue, while the remaining 750 crore INR will be an offer for sale for its early investor Info Edge.

As per the latest report, the SEBI, Securities and Exchange Board of India reviews Zomato’s DRHP, the registration document submitted by IPO-bound companies, to check whether any control extends with its Chinese investor Ant Group.

Additionally, the market regulator checks whether Ant Group would issue any right shares or bonus shares that would need approval under the amended FDI, foreign direct investment norms for China.

According to a source to Business Standard, which first reported the development (1), the regulator is looking at certain aspects, including whether startups are under the control of Chinese investors or if they have any controlling interest as per the Takeover Code.

It is worth noting that Ant Financial has been a backer of Zomato since 2018 when it scooped up a 14.7% stake in the company. It increased its holding to 25% last year, with its investment amount totaling more than 3,243 crore INR (2).

According to SEBI’s definition, a control in a company is as having the right to appoint a majority of directors, the right to control policy decisions, and the right to control the management. Such rights are usually practiced by companies or people holding shares or having contractual rights under a shareholders’ approval (3).

Read Also: Much Awaited Zomato IPO is Here, Worth Over 1 Billion USD

Zomato’s Shareholding Structure

According to Zomato’s ownership stakes, as disclosed in its DRHP, its largest stakeholder is Info Edge, which holds about 18.55% and will be selling shares worth over 750 crores INR 100 million USD in the IPO process.

Info Edge holds about 1.24 billion shares in the food aggregator. However, its shareholding has been diluting for the previous two years as more investors came on board to invest in the company. According to the DRHP document, Info Edge owned over 27.45% shareholding in the firm two years ago on a fully diluted basis.

The entry of Uber, Sunlight Fund, Chinese investors, and others in 2019 further diluted its shareholding to 24.13%

While Zomato had over 75 shareholders last month, only 18 of them have over 1% stakes.

An overview of Zomato’s Shareholding as per its DRHP Filing (4):

  • Info Edge: 18.7%
  • Uber B V: 9.2%
  • Alipay Singapore: 8.4%
  • Ant Financial: 8.3%
  • Internet Fund VI: 6.0%
  • SCI Growth Investments II: 6.0%
  • Deepinder Goyal: 5.6%
  • Others: 37.9%

Notably, Chinese investors like Alipay and ANT Group have partially exited the company, reducing their shareholdings to over 8%. Another Chinese investor, Sunlight Fund, had completely exited the firm after selling its 1.21% shareholding comprising approximately 6.4 crore shares.

Chinese Investments in Indian Unicorn Startups

The table below illustrates some of the major Indian unicorns that have received funding from Chinese investors (2020):

Chinese investors in Indian unicorn image 1

China’s Holding in the Indian Economy

According to GlobalData, investments from China had totaled up to 8.7 billion USD in the past five years (2015 – 2020). Chinese investors poured more than 2 billion USD in 2018, which increased to 3.9 billion USD in 2019 (5).

However, it is not only the Chinese investors who have had significant reach in the Indian market. Chinese companies have also enjoyed a significant grasp on the Indian market. China-based smartphone companies such as Xiaomi and Oppo led the Indian market with about 72% market share in 2019 (6).

Why Indian Startups Preferred Chinese Investors?

Over the past few years, India has acquired the top third spot worldwide when it comes to the startup ecosystem. However, over 80% of the investment capital in these startups has come from overseas investors (7).

One of the major factors for startups accepting Chinese investors has been lack of capital in the country or shortage of capital directed towards innovation-driven startups. Until recently, local investors had taken little to no interest in the startup ecosystem.

Additionally, India also lacks behemoths such as Facebook and Google, who would take particular interest in innovation-driven startups. Even Reliance Ltd, India’s highest-valued organization, had to seek Facebook for investments.

If it is taking companies how such a huge scale to grab the attention of international investment behemoths, it is challenging for startups to do the same. Chinese investors recognized the gap and successfully replaced American giants from the space.

Another contributing factor is Chinese investors’ patient capital. They primarily target initial-stage startups. Startups at this stage aim to ensure growth and increase their market reach, which demands huge capital expenditure.

That is where the patient capital Chinese investors’ offers come into play. Unlike local investors who prefer secure investment or profitable companies, Chinese Investors recognize valuable startups and offer them capital to help them grow.

Why are Chinese Investors Interested in Indian Startups?

As we talked about, most Indian startups have Chinese money in them. One of the most plausible reasons for it is that Chinese investors have seen progress with the internet way before India. Now, they are backing Indian entrepreneurs to build similar products that they have witnessed and understood in China (8).

Zomato, Paytm, Ola, Dream 11, and BigBasket are some of the most prominent Indian unicorns. Ant Financials, Tencent, Hillhouse, Fosun, and Steadview, are some of the major Chinese investment firms invested in the Indian startup ecosystem. However, the recent border tensions between the two nations have dampened the mood, with India imposing FDI curbs targeting China.

While it has affected the startup ecosystem, it is not like our startups don’t have alternate fund sources available.

Read Also: How India is Collaborating with Foreign Nations for its Startup Ecosystem

Changing Priorities of Indian Startup Founders

In 2019, Chinese investors invested over 3.9 billion USD in Indian startups, up from about 2 billion USD in 2018. However, the investment scene took a U-turn in May last year amid the face-off between the two nations at locations along the LAC, Line of Actual Control, in eastern Ladakh (9).

The tensions and skirmishes between India and China led to India rolling out a new policy to block ‘opportunistic takeovers,’ needing all FDI from neighboring countries to get direct government approval.

Consequently, the investment from China in Indian companies fell to 263 million USD across 15 deals in the first half of 2020 (10).

We can say that the coronavirus pandemic came as a wake-up call for the Indian startup ecosystem. Now, founders have started to keep their checklist to vet their potential investors. Today, their top needs are that investors should not be from China.

A recent Innoven Capital report also found that an investor’s ability to follow up with more funding was also among their top needs. It has emerged as more crucial than the conditions an investor put down in place of the offered capital.

The pandemic caused several startups to an abrupt halt for months, and the cash left in their banks had suddenly started narrowing. Hence, today founders want to know if investors on their cap table can shell out more capital during a crisis (11).

Chinese investors

According to a Business Insider (12) conversation with Ashish Sharma, the Chief Executive at Innoven Capital, this year’s ability to follow on funding has been uptick because of the pandemic. There had been a complete market dislocation for about four to five months. And, once founders go through such a black swan occasion, they get a higher appreciation for having investors that can support even with an unfavorable external environment.

In 2020, prominent investors such as Sequoia India, Lightspeed, Chiaratae Ventures had closed their funds. In a conversation with Business India, Bhaskar Majumdar, Managing Partner at Unicorn India Ventures, said that most funds went to business during the pandemic, which was already doing well or had backing from notable VCs.

Indian Startups Have Now Started to Shun Chinese Investors

It comes as no wonder that Chinese investors are now finding themselves in the backseat when it comes to a startup founder’s preference table.

Chinese investment firms such as Alibaba, Tencent who had been so far a favorite, are now looking for an exit from their Indian investments (13).

Chinese investments account for about 4 billion USD in the Indian tech startups, including bets on 18 out of India’s 30 unicorns, as per the Gateway House report released in March last year.

According to the Innovent Capital report, the inclination for Chinese investors has gone down significantly from 29% in 2020 to 3% in 2021.

With the Indian government regulations on Chinese investors and the backlash against Chinese apps in the light of the Indo-China border clash, founders have been conscious. Indian startups backed by Chinese investment firms have been subjected to a crackdown on social media platforms, which has deviated from their ‘Made in India’ image.

People even called for bans on products and uninstalled Chinese and China-funded apps in the country.

In a wave of anti-China sentiment, even Zomato workers in Kolkata hit the headlines in July last year when they burned their t-shirt to protest the violence and Chinese investment in the company (14).

However, the damage was already done when India changed its FDI regulations in April last year (15).

Read Also: Emerging Indian Startup Ecosystem, Red Flag, Government Role

It is an added layer of red tape that Indian founders do not wish to go through. A startup typically starts securing capital six months before the set cash runaway since it takes three to fourth months to finalize a funding deal and sign a term sheet. After that, it has to go for approval, and the founders are not 100% sure about its approval. Hence, it is obvious that Indian founders have started being jittery.

And as a result, funding from Chinese investment in India fell from 3.5 billion USD in 2019 to about 1.5 billion in 2020, as per Venture Intelligence, a data analysis firm.

Nonetheless, Indian founders have access to a wide range of capital pools to fill the gap from lack of Chinese money (16).

The Present Scenario

The Indian tech startups have seen steady growth at a scale of eight to ten percent year on year, with more than 1,600 tech startups and a record number of 12 other unicorns added last year, and with more to come in 2021.

Read Also: India on Unicorn Spree, The Party has Only Started

Sensing the environment, homegrown tech startups have begun to look around for capital within the country, and local investors and VCs are answering their calls.

In mid-March, existing investors and a few prominent Indians bought out Shunwei Capital, a Chinese venture firm’s minority stake in Twitter’s domestic competitor, Koo’s parent company, Bombinate Technologies (17).

Javagal Srinath, former Indian cricketer, Ashish Hemrajani, founder of BookMyShow, Sujeet Kumar, co-founder of Udaan, Kalyan Krishnamurthy, CEO of Flipkart, and Nikhil Kamat, founder of Zerodha, participated in the round to buy out Shunwei Capital shares.

Notably, it had a bit more than a 9% stake in Bombinate Technologies.

Koo, which places itself as an ‘Atma Nirbhar’ application for the country and the world with more than 40 lakh users, had earlier scrutinized its links to Chinese funding. In its response, the microblogging platform stated that it has been among the first companies in India to be proactive in its exercises to clean up its cap table and has doubled its commitment to creating an Aatmaribhar app.

Cashify, a re-commerce marketplace that offers an online portal to sell used or old electronic gadgets, has Chinese investors in its cap table. It had secured 15 million USD from Olympus Capital Asia in March, a middle-market private equity firm based in New York (18).

According to the CEO of Cashify, Mandeep Manocha, the company is looking forward to accelerating its investment in electronics reuse and recycling space. Hence, the company is enabling OEMs and customers to reduce their carbon footprint materially.

Cashify’s finance and accounts Vice President Arun Pratap told IANS that the company has been lucky to have excellent investors globally who are not in for the short-term haul and believe in the Indian market.

He added that the company is more than happy to welcome domestic investors. However, it won’t be correct for it to say that the company is shying away from international investors since they have played a huge role in shaping the journey of Cashify since its inception.

What is more crucial for the company is making the best use of the capital, be it from domestic players or overseas investors. Shortly, the company is planning to go ahead with these resources and create new job opportunities. At the same time, contributing to the idea of Mak in India with domestic innovation and growth of technological know-how, he elaborated.

As per Vishesh Rajaram, Managing Partner at Speciale Invest, a seed-stage venture capital firm, they are already witnessing a steady surge in founders with technical insights coming with a vision to build technologies to make India a self-sufficient nation.

A huge portion of the portfolio founders in Fund I are creating products and IP stacks to contribute to the country becoming self-sufficient across varied areas.

Rajaram told IANS that Agnikul Cosmos is creating India’s private launch vehicle, ePlane Co is creating electric planes to make more accessible and cheaper transportation in India, while Astrogate Labs is building the country’s first optical communication terminals to make communication more accessible in the country.

Wrapping Up

Even though there had been a low number of total startup deals last year, seed-stage investments are witnessing recovery at a good pace as investor activities at lower ticket sizes have surged in India.

Seed-stage funding last year recovered more than 90% of the 2019 level. Early and late-stage investments are also witnessing a steady recovery (19).

While India has started clearing investments from China, nearly 150 investment proposals worth more than 2 billion USD are stuck in the pipeline for over a year now, as per the latest report.

According to sources (20), the government plans to split these proposals into three categories depending on the national security risk. Proposals from non-sensitive sectors will witness faster approval, while those considered as sensitive will be reviewed later.

However, there have been no official comments about when these proposals will be cleared.

In such a scene, securing money from countries other than China and Indian investors is logical, and startups have started to lay out a new funding route.

Read Also: Why India is Approving China FDI Proposals