PE/VC
PE/VC

Since the Centre tightened the Press Note 3 norms in April last, as many as 150 private equity/venture capital investment applications from China and Hong Kong are pending with the government, starving the country's startup ecosystem of funds, says a report.

The Press Note 3 (PN3) changes were effected in April, restricting foreign direct investment from countries that share land borders with India. Analysts are of the view that the move was primarily aimed at China as lots of private funds were investing billions into domestic companies.

The lack of clarity on what constitutes 'beneficial ownership' as defined in the new PN3 has also led to the steep decline in PE/VC investments from China and Hong Kong.

"Since the changes were effected in April 2020 to the PN3 regarding foreign direct investment, more than 150 applications from Chinese/Hong Kong entities seeking investments have been pending," according to the report by law firm Khaitan & Co.

As per data from Venture Intelligence, a Chennai-based firm which tracks financial transactions and valuation of private companies, such investments from China and Hong Kong have fallen by a full 72 per cent to USD 952 million in 2020 from USD 3.4 billion in 2019.

The countries that share land borders with India are Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan. Before the April changes to PN3, only entities from Pakistan and Bangladesh needed prior government nod for investments.

Khaitan & Co Partner Rabindra Jhunjhunwala told PTI that while the government's intent is to "curb opportunistic takeovers/acquisitions of domestic companies due to the pandemic, the primary target seems to be China." The PN3 changes are seen as retaliatory measures to put economic pressure on Beijing, he said, pointing to the December 17 changes effected in telecom gear procurement norms as well as ban on around 200 Chinese apps, including TikTok and PUBG.

The new PN3 guidelines state that an entity of a country that shares a land border with India can invest only under the government approval route. Such proposals also need permission from the Union home ministry.

The guidelines also cover the beneficial owner of an investment who is located in any such country and also its citizens. The note, however, does not define the term "beneficial owner" leading to the confusion and thus the pending applications.

Investments that have Chinese, Taiwanese, Hong Kong, and Macau beneficial ownership now need government nod in advance, irrespective of the quantum of investment.

Since the past few years, technology and internet businesses have been the chief beneficiaries of PE/VC investments from China, apart from financials and pharma, according to the Khiatan & Co note.

However, despite the pandemic and a massive drop from China, PE/VC inflows hit a record USD 39.2 billion across 814 deals in 2020, according to data from Venture Intelligence. Of this, as much as USD 27.3 billion was invested in Reliance Retail and Jio.

According to Arun Natarajan, founder of Venture Intelligence, geo-political compulsions, which led to marked slowing down of investments from Chinese investors into domestic companies, was another ecosystem altering feature of 2020.

Investments from China and Hong Kong, which have been two key sources of PE/VC funds into the startups ecosystem till 2019, declined 72 per cent to USD 952 million in 2020 from USD3.4 billion in the previous year.

While investments from mainland China have fallen 64 per cent to USD 377 million, those from Hong Kong have plunged 75 per cent to USD 575 million in 2020, as per the data.

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