Private Equity, Venture Capital Funds to Approach Govt for Clarity Over Change in FDI Rules

India’s leading private equity and venture capital funds, both domestic and foreign, are writing to the government to obtain clarity over the decision to place FDI investments from China under approval, three persons aware of the development told Moneycontrol on condition of anonymity.

Industry body Indian Venture Capital and Private Equity Association (IVCA), are appearing on behalf of the firms and they are drafting the document with law company Khaitan and Co. They will be approaching the government in the coming week.

Khaitan confirmed the news, but IVCA refused to comment, the report said.

In order to ensure that foreign companies do not take advantage of the economic slowdown resulting from the global coronavirus pandemic, the central government on April 18 revised its Foreign Direct Investment (FDI) policy.

According to the new policy, "an entity of a country that shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country can invest only under the government route". The nations sharing land border with India include Bangladesh, China, Pakistan, Bhutan, Nepal and Myanmar. Ever since the VC and PE industry has been hit by uncertainty.

Though the amendment seeks to check Chinese investors from gaining control of Indian companies at cheap valuations, the abrupt nature of the note has firms jostling to handle its ramifications. An unintended fallout is that the revised norm also includes venture capital and private equity funds, whose investors (limited partners) may be Chinese institutions or high-net-worth individuals, who are now also subject to inspection.

Big global funds, including Warburg Pincus, Carlyle, Blackstone, Sequoia Capital and Accel, may have Chinese LPs as minority investors in the fund, as per lawyers and investors Moneycontrol reached out to. Thus, if Chinese LP pitch in a small amount to the fund, it, too, is subject to approval.

On Saturday, three sources told Reuters that the government was planning to fast-track the review of certain investment proposals from neigbouring countries such as China after concerns that the new screening rules could affect plans of companies and investors.

Advisers to Chinese firms have responded by saying that they are concerned the process could take several weeks and affect deals and investment timelines. Notably, auto firms such as SAIC's MG Motor and Great Wall, and investors Alibaba and Tencent have placed big bets on India.