Before change in FDI rules, Chinese invested millions in Indian tech firms

With the coronavirus pandemic expected to generate more interest from consumers in these businesses, revenue and profit projections could be revised skywards
The Narendra Modi-led central government has announced some foreign direct investment (FDI) restrictions apparently targeted at China, but it may have shut the stable door long after the horses bolted, shows an examination of recent investments in top Indian technology companies.

Business Standard examined investments made in companies like Byju’s, Paytm, Zomato, Ola, Swiggy and Oyo — some of the so-called unicorns, or start-ups with valuation of over $1 billion — and found that the Chinese put big money for significant stakes in them between January and April 2020. This was a time when Indian and global firms were battling the immediate impact of the coronavirus pandemic.

Investments made in these companies are significant, as most of them are expected to gain not only from incremental business opportunities presented by the ongoing nationwide lockdown but also after economic activity resumes in the country.

It wasn’t just the Chinese. Top hedge funds and corporations owned by American billionaires, a South Korean chaebol, and Japan’s Softbank also made key investments in these firms — in some cases to take new stakes and in others to increase their existing shareholding. Five of the 18 technology companies examined — Byjus, Paytm, Swiggy, Zomato and Oyo — have received a total of Rs 8,217 crore (over $1 billion) since the start of this calendar year through allotment of shares to overseas investors.

Hedge funds controlled by American billionaires have accounted for as much as Rs 2,964 crore ($387 million) of these investments in four of the companies that allowed them to increase their shareholding marginally. Japanese-controlled Softbank made its single-largest and much-publicised investment of Rs 3,757 crore ($491 million) during this period, while an investment fund controlled by South Korea’s biggest chaebol Samsung, along with other Korean venture capital funds, invested Rs 150 crore ($20 million).

The Chinese, meanwhile, increased their stakes by investing Rs 582 crore ($76 million) in some of these technology unicorns. All shares were acquired by these foreign investors by paying hefty premium – many times more than the valuation estimates of the Indian companies concerned.

Regulatory filings show that the most prominent investments made by Chinese-backed funds were in life-services delivery companies – Zomato and Swiggy – one of the few big enterprises given permission to operate even during the lockdown. Various state governments have issued special instructions to police personnel to allow delivery agents of these companies to home-deliver goods during the nationwide lockdown.

The latest investment in Swiggy’s holding company, Bundl Technologies, was made on April 3 by Tencent Cloud Europe BV, a Netherlands-registered company owned by China’s Tencent group. The investment of Rs 143 crore ($19 million) increased the Shenzhen-headquartered Tencent group’s shareholding to a little over six per cent. On February 26, a Beijing-based fund Inspired Elite Investments had increased its stake marginally by picking up shares in Swiggy for Rs 85 crore ($11 million). Inspired Elite Investments is owned by Chinese delivery company Meituan Dinping. Regulatory filings show that Tencent is one of the largest shareholders in Meituan Dinping, with a stake of 20 per cent.

The biggest Chinese investment during the coronavirus crisis period has been in Zomato, India’s biggest food delivery company. It was made by Jack Ma’s Alibaba group through its Singapore-based investment fund Ant Financial Singapore Holdings. On January 16, Ant Financial Singapore Holdings increased its stake by investing Rs 353 crore ($50 million). The Alibaba group, through Alipay Singapore Holding, has a 10 per cent stake in Zomato (though reports suggest the shareholding could be much larger).

Chinese companies, including the Tencent and Alibaba groups, have stakes in several other Indian technology companies with billion-dollar valuations, such as Byju’s, Flipkart and Big Basket, in addition to ‘fantasy gaming’ platforms like Dream 11. Tencent holds a stake in Byju’s through Proxima Beta, its Singapore-based subsidiary, which is the publisher of the very popular mobile game PlayerUnknown’s Battlegrounds (PUBG).

Apart from the Chinese, the South Koreans invested Rs 164 crore (over $20 million) in Swiggy between April 3 and April 9, when the lockdown was in full force. Of this, Rs 43 crore ($6 million) was invested by a Samsung-promoted investment fund. On the day Inspired Elite Investments increased its stake in Swiggy, South African investment fund Naspers, the biggest shareholder in Swiggy, also pumped in Rs 712 crore ($94 million) to further increase its own shareholding. Naspers is also the biggest shareholder in China-based Tencent, which in turn has a stake in the Chinese company that owns Inspired Elite Investments. The South African government is the biggest shareholder in Naspers through its official investment vehicle.

For Zomato, meanwhile, the most significant deal was with the US-based Uber, whose Indian arm sold its delivery business to Zomato for a 10 per cent stake in the company. Regulatory filings show that this all-stock deal was worth Rs 1,376 crore ($180 million).

While the Indian government seems to be concerned about the Chinese enhancing their control over crisis-hit Indian companies, a large number of stake-purchase manoeuvres have been orchestrated by hedge funds controlled by American billionaires. Between January 14 and February 27, two of the US’ biggest hedge funds – Tiger Global Management and General Atlantic – picked up new stakes or enhanced their shareholding in Byju’s. Tiger Global invested Rs 567 crore ($75 million) to pick up a small stake. General Atlantic pumped Rs 756 crore ($100 million) into Byju’s between February 14 and February 27 to increase its stake by over five per cent. In between these transactions, another US venture fund, Discovery Capital, marginally enhanced its stake in Paytm’s holding company One97 Communications by investing Rs 257 crore ($34 million).

The American funds invested in Byju’s and Paytm through their Singapore-based subsidiaries. The Alibaba group, through Alipay Singapore, is the biggest shareholder in Paytm. Japan’s Softbank increased its stake in Oyo by paying Rs 3,757 crore (almost $500 million) towards the end of March – a move that seems to have backfired, with Oyo’s hotel business struggling because of the coronavirus crisis and the company having to resort to massive job cuts globally and significant salary cuts in India.

Business Standard reviewed valuation reports of some of the Indian technology companies before the shares were issued and found that Chinese and American investors paid a hefty premium for buying stakes. In some cases, the premium on the shares was more than double the valuation. What is more interesting is that these valuations — done in November 2019, when the coronavirus pandemic was yet to grip the world — more than doubled within a couple of months. By the look of it, the coronavirus crisis seemed to have significantly raised optimism among investors about these Indian technology companies at a time when some global and Indian stock markets were witnessing a veritable bloodbath.

According to valuation documents, in November 2019, the price of a single preference share of Byju’s was pegged at Rs 70,577 ($928). When Tiger Global and General Atlantic bought stakes in Byju’s in January and February 2020, they paid Rs 1.65 lakh ($2,164) per share – more than twice the official valuation in the pre-coronavirus times.

Documents show that Zomato’s preference share was valued at Rs 1.5 lakh ($1995) apiece in November 2019. Two months later, in January 2020, Alibaba group’s Ant Financial paid Rs 2.94 lakh ($3861) per share — again, twice the official valuation of pre-coronavirus days. In Paytm’s case, Discovery Capital in February 2020 paid a 50 per cent premium over its November valuation of Rs 12345 ($162) a share.

Official valuers had in November 2019 estimated Byju’s revenue to touch Rs 16,444 crore (over $2 billion) by 2022-23 – almost three-fold growth over 2021-22. Its profits were expected to grow almost eight times over. Zomato was expected to follow a similar trajectory during this period. But these projections were done when valuers knew little about the opportunities the coronavirus pandemic might present.

There is already a talk of more virtual classrooms and examinations in the near future – a model Byju’s pioneered in India. The Facebook-Reliance Jio partnership is likely to be a boon for smaller retailers looking to home-deliver goods – a model which has been and is being dominated by the likes of Zomato, Swiggy, and Delhivery. The Indian government is reportedly using these companies to compile a record of all addresses where they are delivering goods by making it mandatory for their delivery personnel to use the official contact-tracing mobile application, Aarogya Setu. In the near future, their business would be as crucial for the Indian government as it would be for their investors.

With the coronavirus pandemic expected to generate more interest from consumers in these businesses, revenue and profit projections could be revised skywards. And, as Chinese companies hold stakes in almost all big Indian new-age technology companies, the biggest gainers could also be the Chinese, in addition to American shareholders.

The stable door might have been shut long after the horses bolted. But if China were to drag India to the World Trade Organization for “discriminatory practices”, and Chinese companies were to pull the plug on funding at the behest of the Communist Party of China, it may well be a triple whammy for the Modi government.


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