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China's crackdown on ed-tech firms and its impact on India, explained

China has asked its for-profit, after-school tutoring institutions in the education technology (ed-tech) sector to convert into not-for profit entities, in the latest round crackdown on tech companies. It has also forbidden them from raising capital and bringing out a public issue.

China has asked its for-profit, after-school tutoring institutions in the education technology (ed-tech) sector to convert into not-for profit entities, in the latest round crackdown on tech companies. It has also forbidden them from raising capital and bringing out a public issue.
The Chinese government officially issued the double reduction policy on Saturday last week. According to the policy, after-school tutoring firms cannot make money and cannot raise capital. The policy also puts limitations on foreign ownership of these businesses, including merger and acquisitions (M&A), running franchises, etc. The companies aren't allowed to hold tutoring sessions on holidays or weekends either.
However, the move did not come as much of a surprise. This is the latest move in China's crackdown on tech companies that started last year. It started when Jack Ma, the founder of Alibaba Group said Chinese regulators stifle innovation. He had disappeared from public eye soon after making this statement.
Eventually, his company Ant Financials' IPO-touted to be the biggest in the world-was called off as the regulators tightened rules for firms to go public in the American markets.
Recently, Didi - a ride hailing company in China - had to bear the regulators ire soon after the company's $4.4 billion New York listing. Within 48 hours of the IPO launch, regulators spoiled the party when they initiated an investigation into the company. Two days later, its app was pulled off the app store as regulators alleged Didi was illegally collecting and using personal data of its users.
China seems to be sending a couple of messages from its actions. One, "minimize interaction with the Western markets". It is intent on decoupling Chinese companies from Western markets, if its actions in the past year is anything to go by.
Two, "we are the boss". On the heels of Jack Ma's statement, President Xi Jinping and the Chinese communist party are sending messages to entrepreneurs to show them who's the boss. Here comes the classic Big Tech versus government war. It is raging everywhere - in the US (US vs Facebook/Google), in the Europe (France vs. Google), in Australia (Australia vs Google), and India (Centre vs. Amazon/Flipkart and Facebook/Twitter).
But after all is said and done, this also means all that funding from the Chinese markets have to go somewhere. Somewhere like other attractive emerging markets with large available markets. Somewhere like India.
"It is very clear the return on equity of these digitalized companies is high and the future is bright and the people want to find alternative," Mark Matthews of Julius Baer & Co said.
China's ed-tech is a hefty sector and had raised close to $16 billion in 2020 from names like Alibaba, Tencent, Tiger Global, Temasek.
"The reason why they liked China for the last 10 years was it had a new economy sector whereas the rest of the world outside of the United States didn't, maybe one or two companies in every market.
Therefore, the idea is India has a nascent and large upcoming new economy sector that will be investible, accessible makes it much more appealing especially in light of what is happening in China," said Matthews.
Indian tech firms are all looking to raise money, even considering the IPO route, as Zomato did. Very soon Paytm and Policybazaar will hit the bazaar with their Rs 16,600 crore and Rs 6,500 crore issues, respectively.
Watch the accompanying video of CNBC-TV18's Prashant Nair for more details.