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Beware of the Chinese backdoor in Indian internet space

We already saw an example of this with the popular game PUBG coming back to India through the South Korean firm Krafton. This is the backdoor that may be used by other firms as well

In April 2020, the Indian government issued a directive (“Press Note 3”) to regulate all foreign direct investment (FDI) coming from countries that share a land border with India. While this theoretically impacted several countries, the main target was China.

In the pandemic-led recessionary environment, Chinese firms were actively scouting for investment as well as hostile buying opportunities in the corporate space. Many countries around the world were beginning to get wary of a potential Chinese takeover threat to their businesses. India acted early and proactively to thwart this threat.

The press note ensured that all investment coming in from India’s neighbouring countries follows the government route, which requires prior permission. Any investment from these countries could not take the automatic route, even where allowed at a sectoral level as per the extant FDI policy.

Later last year, the government proceeded to ban several Chinese apps from the Indian mobile stores in the wake of the Galwan Valley clash with China. Following the uncalled-for aggression and territorial heist that China attempted in Ladakh, this measure became an integral part of a strong Indian response. Pushing back on digital colonialism was also a strong sign that India will not tolerate Chinese attempts to usurp or even influence any Indian asset, including consumer data.

This theme played out strongly around the world. The Indian measures were hailed in several countries and indeed, the Chinese technology sector has since been in a tailspin. Increasing global scrutiny and an illiberal domestic crackdown by the Chinese regime has smothered the consumer internet businesses. As these businesses search for new bounce-back opportunities, they are increasingly looking to re-enter India through the backdoor.

We already saw an example of this with the popular game PUBG coming back to India through the South Korean firm Krafton. The Chinese firm Tencent has an investment in Krafton. While PUBG was removed from Indian mobile stores mainly due to the Tencent link, the new launch also has the same link, albeit indirectly. This is the backdoor that may be used by other firms as well.

Shopee, a popular e-commerce app has been hiring in India extensively. LinkedIn has several ads advertising jobs at Shopee, and many profiles on the professional networking site already display Shopee as the current employer. Shopee is a Singapore-based popular shopping app, which is an e-commerce, mobile-based business. It is a big firm in South East Asia, working in various models like consumer to consumer as well as business to consumer. One of its business models in the region is to ship goods from small Chinese firms to other countries via a marketplace.

It is not confirmed that they will for sure launch an Indian business. Perhaps the Indian hiring is to support supply chain, logistics and analytics functions for the Korean market as some of their job openings suggest. Nonetheless, it is instructive to look at their corporate structure.

Shopee is part of the Sea Group, which is a parent firm for several digital businesses. The Sea Group was previously Garena, a firm that restructured in 2019 to make Sea Group the parent entity for various business interests. Garena itself started focusing on the gaming business of the Sea Group, while Shopee became the flagship digital and social commerce business.

Garena provides a platform for several games. Free Fire, one of their offerings, is available in India already. Gaming enthusiasts in India are already familiar with this multiplayer battle mobile game. Its India Instagram page has 8.1 million followers and technology web pages publish the game’s redeem codes regularly.

It is not well understood that the Sea Group has significant Chinese connections too, though being based in Singapore. Tencent holds 23.3% of the voting rights in the firm as per their annual report for the year 2020. In fact, the annual report lists Tencent involvement as one of key risk items – “our founder and Tencent have substantial influence over our business, including significant corporate actions such as mergers, consolidations, sales of all or substantially all of our assets, election of directors and other significant corporate actions.”

Sea Group also mandates that any significant business reconfiguration will require a nod of 80% of Class B ordinary shares. Sea Group employs dual class shares, where the ordinary Class A shares have lower voting rights. Tencent holds 43% of Class B shares, effectively ensuring that no key business decision is taken without Tencent approval.

These examples show how China-led and controlled investments can still find ways to enter India, though it may not be apparent on the face of it, as the holding companies may be located outside China. The Indian government needs to plug this gap and prevent the proliferation of such Chinese backdoors in the country.

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