This May marked the conclusion of the third round of negotiations for a free trade agreement (FTA) between India and the UK. This deal will aim to double trade and investment between the two countries by 2035, adding an excess of £28bn in trade value per year.
“A new trade deal with India’s booming economy offers a wealth of opportunity for great British businesses and will help build on our already strong trading relationship worth over £24bn a year,” Lord Gerry Grimstone, the UK’s minister for investment, tells fDi.
Negotiations have included discussions about lowering tariffs, increasing ease of business and loosening visa restrictions.
Discussions around the FTA have focused largely on areas such as exports and manufacturing. A less-explored area is the effect the deal will have on the relationship between the UK’s booming venture capital (VC) funds and India’s vast start-up talent.
Chandru Iyer, head of business development for south Asia at consultancy Grant Thornton, has been working on the UK–India business corridor for more than 15 years. “India is churning out ‘unicorns’ like nobody’s business,” he says, referring to the 42 companies valued at more than $1bn in 2021 alone, according to the latest Nasscom Tech Start-up Report. “India’s tech landscape is phenomenal, but US and Japanese exposure to it is a lot higher [than the UK’s]. This is a challenge, but the FTA will make that difference. It is going to be a watershed moment.”
UK venture capital scene
British VC and private equity funds invested globally a total of £25.1bn in 2020, up from £22.3bn in 2019, according to figures from the British Private Equity and Venture Capital Association, with more than a third of it going to the UK alone.
Much of the UK’s VC remains invested within Europe, says Alpesh Patel, dealmaker for the UK Department of International Trade. “When you are setting up a VC firm, often your remit is geographic to your home country, and when it is not, often it is to developed markets, such as Europe.
“We find that it is rare to see a British VC which is global and also looking at emerging opportunities in other countries such as India, which is unfortunate because they are missing out on a lot of potential investments,” he adds. “You can see the Americans have gone out and set up in India and are gaining from it.”
According to Bain & Company’s India Venture Capital Report 2022, global VCs led more than 90 mega-rounds of over $100m in funding in 2021, compared to approximately 20 in 2020. VC funding reached a total of $38.5bn in 2021, growing by a factor of four from the previous year. Of the top five investors in India, four are US-based firms including Tiger Global and Sequoia Capital, with the other being the Japanese VC firm SoftBank.
Some UK investors have bucked the trend and gained exposure to the Indian market early on.
In 2014, British International Investment (BII) — the UK government’s development finance institution — began investing in India’s digital start-up segment. Now, BII has a combined portfolio of $3.08bn in India.
“When we entered India, Chinese funds were quite active in the ecosystem,” says Abhinav Sinha, managing director and head of technology and Telecoms at BII. “But around this time, they left to seek opportunities in China. Then Covid-19 hit and that left a big gap. Indian entrepreneurs looked to take more funding from elsewhere, whether that be the US or the UK. There is a lot of receptivity to people coming in.
“I think there is a natural alignment between India and the UK. There is a product-market fit given shared language and culture,” Mr Sinha adds.
Ease of business
As Akshay Chaturvedi, founder of Indian start-up Leverage Edu, notes: “It’s not a clear cookie-cutter option for UK funds to come into India at the moment. Despite the fact that China has stopped deploying the same capital in India, they still have to face competition with American firms.”
Arbinder Chatwal, head of India advisory services at BDO UK, agrees: “If you look at the heart of any flourishing trade deal, it’s going to be your mid-market companies who do it. A successful deal has to support those guys. The best example of a successful FTA is the Australian one.”
The UK–Australia FTA, signed in December 2021, gave businesses “full and fair access to invest across the UK and Australian economy, making it easier than ever for Australian venture capital to invest in promising UK start-ups”, according to a recent report by the UK’s Department of International Trade.
Although it is yet to be seen whether the India–UK FTA will provide the same opportunities, Mr Iyer comments that “something like an FTA between the two countries which looks to increase ease of business will help the start-up–VC ecosystem flourish on both sides”.
Streamlining talent access
“One of the most common reasons cited by mid-market clients looking to invest in India, is the ‘perception’ of red tape and bureaucracy”, says Mr Chatwal. “Absolute reduction or even perceived reduction of red tape will make India a more lucrative destination.”
Mr Patel comments that “if the profile of opportunity [in India] is raised more and more by the FTA, that will help [the relationship between UK VCs and Indian start-ups]”.
During his visit to India this April, UK prime minister Boris Johnson hinted that the FTA could mean loosening visa restrictions for skilled workers from India. “I have always been in favour of talented people coming to this country,” he told reporters. “We are short to the tune of hundreds of thousands of people in our economy and we need to have a progressive approach — and we will.”
Easier visa regulations would facilitate Indian start-ups entering the UK market and gaining greater access to funding. Sagar Ahuja, CEO of QX Accounting Services, says that “for a firm like ours to send someone to the UK as a skilled worker now, we’re looking at about £4000 [in total visa related costs]. For China, it’s [just] £800.”
The FTA may “help small and medium-sized enterprises (SMEs) drive the relationship. Onshore staff will definitely help,” says Mr Ahuja.
Lord Grimstone comments: “We want a deal that supports all businesses — from innovative start-ups and SMEs to globally recognised brands — by knocking down barriers to trade, and opening a huge new market for trade and investment. That’s why two of the first chapters we have closed talks on are SMEs and innovation.
“We look forward to our new agreement creating more opportunities in both countries, boosting our economies and supporting jobs.”
This article first appeared in the June/July 2022 edition of fDi Intelligence. Read the online edition of the magazine here.