The Indian government's decision to ban 59 China-owned apps will deter venture capital investment from parent companies including Tencent Holdings Ltd. and Alibaba Group Holding Ltd., experts told S&P Global Market Intelligence.
Apps including Beijing Byte Dance Telecommunications Co. Ltd.'s TikTok, Tencent's WeChat and QQ Music, Alibaba's UC Browser, Xiaomi Corp.'s Mi Community and Video Call, Baidu Inc.'s Baidu Translate and Baidu Maps were blocked in India on June 29 as the government said they could endanger the country's national security.
The decision comes as growing tensions between China and India saw the latter hold tech imports at the countries' shared border — a move that could see Chinese smartphone maker Xiaomi Corp. experience production and product launch delays, as previously reported.
In April, India also tightened the approval process for foreign direct investment from any country with which it shares a border.
The apps ban will lead large, strategic Chinese tech companies which pumped capital into many of India's unicorns, to invest in Southeast Asia or parts of Africa instead, according to experts.
"I expect some sort of rollback or watering down of investments from the likes of Tencent and Alibaba from this sudden ban, until India's regulatory frameworks and guidelines are clear," Jayanth Kolla, founder of Convergence Catalyst said, adding that Chinese investors were already on the back foot following the April policy changes.
For India's venture capital sector this is a "bad move" as Chinese tech companies were prominent big-ticket investors for a number of well-known startups in the country, Kolla said.
According to a February report by think tank Gateway House, Chinese tech companies have invested an estimated US$4 billion in Indian startups and as many as 18 of the country's 30 unicorns are backed by Chinese investors.
Alibaba, for example, has invested in sectors including e-commerce, social media, fintech, logistics and more. It backs Paytm, Paytm Mall, BigBasket, Zomato, Snapdeal, Healofy, TicketNew, Vidooly, Rapido and Xpressbees.
Tencent is present in e-commerce, gaming, logistics, education, fintech and more with investments in Flipkart, Byju's, Ola, Swiggy, Udaan, Dream11, Hike, Gaana, Practo, Doubtnut, Niyo, Khatabook, MX Player, MyGate, and Pocket FM.
Xiaomi too has funded a few Indian startups including ShareChat, ZestMoney and Hungama Digital Media Entertainment Pvt. Ltd. through Shunwei Capital.
Alibaba and Tencent investments in India fell in 2019 compared to 2018, as a result of trade disputes and a global economic slowdown, the experts said.
Both companies enjoyed a "considerable spree" in 2018, making an aggregate 243 investments, Jamal Hassim, founder and CEO of entertainment platform BOLT Global told S&P Global Market Intelligence.
John Harrison, EY's global M&E leader said that as far as last year's investments go, Tencent and Alibaba were applying an "increasing amount of discipline" when it came to investing in India's venture capital space and focusing on returns.
Given the reliance on institutional investors and Chinese money, India's tech startups are bound to see funding dry up in the near term, the experts said. Early and growth-stage companies are most at risk, they said.
The fall in capital from China may leave room for other investors though. "We can expect investors from the Middle East and the U.S. to deploy funds in India as they will see this as an investment opportunity," said Sanchit Vir Gogia, founder of Greyhound Research.
In the last three months, a string of investors including Saudi Arabia and Abu Dhabi's sovereign wealth funds, U.S.-based private equity firms, Facebook Inc. and Google LLC have poured money into Reliance Industries Ltd.'s Jio Platforms.
Japanese venture capital firms will also be interested in India as an investment destination but will likely come in with smaller ticket sizes compared to their U.S. and Middle Eastern counterparts, Kolla added.
Chinese investors may also "look to temporarily re-route their money either through other funds who can invest in India or look to Southeast Asian countries like Vietnam and Indonesia as growth markets," Gogia said.
Indonesia, in particular, has been an e-commerce battleground for two of the largest Chinese tech companies Tencent and Alibaba that invested in Gojek and Tokopedia, respectively.
Taimoor Tariq contributed to this article.