On 3rd November 2020 – just two days before the Ant Group’s Initial Public Offering (IPO), the Chinese government decided to suspend the process of its listing.
Though it came as a shock, investors did not anticipate that a series of such decisions may unfold in the next few months.
In July 2021, the Chinese government reclassified tutoring companies (edtech) as ‘not-for-profit entities. The Chinese government also unveiled many decisions over a period. These include restrictions on time spent on gaming apps, fines by the anti-trust regulator, taking applications off mobile stores citing cyber-security issues, and the introduction of minimum salary rules for delivery staff.
These decisions have made many global investors circumspective about their investment in new generation Chinese companies.
“Chinese technology companies lost around 30 percent of their market cap in the past six months.”
As investors turn jittery over the prospects of Chinese equities, some may want to look for alternatives in the Emerging Markets universe.
India, with the second-largest internet consumer base after China, is one of the key markets. It may benefit from this changing focus of global investors. Though the Indian listed space does not house many new generation tech companies, there is a long pipeline of savvy tech companies in the start-up and unlisted space.
Compared to around 170 Chinese Tech startups having unicorn status, India has only 71. However, Indian numbers are fast improving in the last few years. For example, 34 Indian tech start-ups have become unicorns in 2021 compared to 15 Chinese Tech start-ups so far.
This growth has come on the back of a strong digital infrastructure and rising interest shown by investors in India’s consumer internet story. The Covid-19 pandemic has only accelerated this trend. Global liquidity is likely to chase India post this quagmire in China.
As can be seen in the table below, the gap between venture capital (VC) funding in start-ups from China and India, though significant, has narrowed down this year.
Till September this year, VC investors have poured in over USD 21 bn in the Indian tech start-ups. China has seen around USD 72 bn of investments in the same period.
According to Global Data, China accounted for about 60% of the total VC funding deal value in the APAC region during the first nine months of 2021 while its share in global VC funding deal value stood at around 15%.
Though China has received three times the investments of India, a certain amount of these investments may flow to India in the near term. Investor action in the Indian technology space has shown continued momentum.
The successful IPO of Zomato, Nykaa, Policybazaar, Paytm, Nazara, and Easy Trip Planners followed by a crowded IPO pipeline of new-age tech companies such as MobiKwik, Delhivery, Oyo Rooms has underlined the trend that investors’ interest is not restricted to private markets.
The stage is set right to attract foreign investments in Indian tech startups – both at the venture capital stage as well as in public markets. This can be a win-win situation for all stakeholders.
The startups receive capital at good valuations, investors get to participate in growth stories in one of the best-emerging markets and the Indian government gets sustainable economic growth and development.
This will ensure that many Indian tech start-ups in segments such as edtech, gaming, fintech, and SaaS are likely to benefit in the medium term.
The Indian democracy and financial markets have demonstrated a fair amount of stability and consistency in policy framework over the years along with a willingness to embrace progressive reforms.
A few more developmental steps by policymakers in India can further enhance the business environment and access to capital for Indian tech companies.
For example, allowing the overseas direct listing of Indian Tech start-up companies can be a big policy decision. It not only helps Indian Tech start-ups gain access to overseas capital in a cost-efficient way but also improves corporate governance standards as most developed markets demand high transparency in operations.
Indian policymakers have already done a fair bit. For example, the recent telecom sector reforms like rationalizing government levies, allowing 100% foreign direct investment under automatic route in the telecom sector, and creation of spectrum auction calendar will make India 5G ready.
Besides this, it will create one of the best digital infrastructures in India even from global standards. This will set the stage for exponential growth across tech companies that rely on high-speed internet and low latency for innovative digital applications.
In the context of the facts, in the coming months, India is likely to see increased interest from global investors. The three factors–the Chinese tech crackdown, a booming tech sector in India, and progressive reforms of Indian policymakers will ensure that global investors will show high preference towards India when it comes to diversifying their investments.