Chinese technology major Tencent recently announced its purchase of a 0.72% stake in Flipkart India, equivalent to $264 million. While the transaction was completed in October 2021, the companies shared the documents with Indian authorities at the beginning of FY22 amid rising tensions between the two countries. The ties between the countries have become challenging, especially after the conflict in the Galwan Valley in 2020, which led to a cascade of restrictions from the Indian side, including increased scrutiny on Chinese foreign direct investments (FDI) and curbs on the import of Chinese products and services.

Stricter Covid-19 guidelines are also adding fuel to the fire, with restrictions on travel in and out of both countries damaging the collaboration. While many Chinese investors have been diluting their stake at a heavy discount in the Indian market amid wider anti-China sentiment, Tencent’s increasing stake in the Indian ecommerce giant is questionable.

Tencent silk route to India

Tencent has been an early investor in Flipkart and now holds a 4–5% stake in Flipkart’s Singapore-based parent company, Flipkart Pte. This represents Tencent’s strategic aim to regain a foothold in the rising Indian ecommerce space after its portfolio companies Shein and Shopee exited the Indian market. To the detriment of Ant Financial’s Indian interest Paytm, Flipkart in India holds a bigger ecommerce market presence with its portfolio of companies—such as Flipkart, Myntra, Flipkart Wholesales, Cleartrip, and PhonePe. As Flipkart looks to list at some point in the current year, the ecommerce giant’s valuation soared to $37.6 billion after it raised $3.6 billion in a funding round in 2021. Since then, it has remained India’s most-valued startup.

According to Brookings India, from 2014 to 2019, Chinese investors infused more than $27 billion into growth and late-stage startups including Paytm, Zomato, BigBasket, Flipkart, and BYJU’S. During this period, Chinese investors participated in 234 funding deals. Out of these deals, 96 deals were recorded in the fintech and ecommerce sectors. However, the market scenario has changed following clashes between Indian and Chinese militaries.

Chinese investors continue to flee Indian territory

Several Chinese investors gave up on their Indian dreams as the growing geopolitical rift led to a stricter Indian FDI policy. For instance, Chinese company ByteDance recently exited Dailyhunt’s parent, VerSe Innovation, at a 56% discount. In March, Chinese companies Alibaba and Ant Group offloaded their entire 43% stake in Paytm Mall for a mere $5.3 million.

In 2021, many Chinese firms—including Xiaomi, Shunwei Capital, and Kunlun—sold their stakes in companies like KreditBee and Koo, while Ant Group partially exited food tech giant Zomato.

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Increased scrutiny from the Indian government

Total foreign direct investment in India from China and Hong Kong plummeted to just $200 million in the 2020–21 period. In the first half of 2021–22, the FDI inflow from these two nations stood at just $36 million. Alongside this, many Indian units of Chinese manufacturing giants—such as Vivo and ZTE—are being probed by Indian authorities for alleged financial irregularities.

Furthermore, ED has seized the accounts of popular mobile manufacturer Xiaomi India for its alleged remittances. Apart from delaying deals, the increased scrutiny also complicates deal-making for investors. If the Tencent investment in Flipkart is successful, it will either bring new investment opportunities for Chinese companies and build a new foundation between the countries, or it could just fall apart like many recent Indo-Chinese investments.