Start-ups saw the government renew its pledge to increase rupee capital participation through the announcement of a new Fund of Funds (FoF) for start-ups. The previous ₹10,000 crore FoF, managed by SIDBI, helped galvanise around ₹90,000 crore for investments in start-ups. The FoF acted as a nucleus around which more rupee capital was formed and invested in the economy. The focus on women entrepreneurs shows the government’s commitment to increasing women’s participation in the economy.
Indian start-ups have suffered from emaciated participation from Indians in their growth story; over 85 per cent of the capital raised by Indian start-ups came from overseas. With the rise of Donald Trump, investors are pulling capital from across the world as they look to fund more businesses in the US for economic and geostrategic reasons. Thus, the need to mobilise Indian start-ups is critical to its future.
In terms of capital mobilisation, the government missed an opportunity to unleash rupee capital to fund Indian innovation by removing the red tape and regulatory restrictions on investing in start-ups and Alternative Investment Fund (AIFs).
In India, the capital gain disparity between listed and unlisted securities, as well as non-residents and residents was removed in the last Budget.
All capital gains enjoy a rate of 12.5 per cent as of now; the previous differential saw unlisted gains taxed at 2.4x the rate of listed gains.
IPOs sans profitability saw companies like Zomato and Swiggy list on the markets and generate billions of dollars of returns for investors.
The last two pieces — allowing LLPs as investment vehicles and allowing endowments, pension funds and insurance companies to invest in AIFs is still pending. The restrictions on such investments denies Indian start-ups long-term, patient domestic capital — a key requirement for investments in AI and deep tech innovation.
The charitable trust investment rules, stated in Rule 17C of the Indian Income Tax Act, 1961, prevents all endowments from investing in Indian AIFs while their foreign counterparts can do so. Indian insurance companies face an October 2022 regulation that goes beyond the ambit of the Insurance Act, 1937, and prevents investments in most VC AIFs.
While the FoF is a great start, liberalisation will truly change the funding landscape for Indian start-ups.
Tax benefits
In order for start-ups to get any of the tax benefits mentioned in the Income Tax Act, 1961, they need to be DPIIT registered start-ups, incorporated after April 1, 2016, and before March 31, 2030, be granted a certificate by the Inter Ministerial Board.
Certification by the Inter Ministerial Board, a government-created group that needs to certify a start-up as “innovative”, has been a dismal failure that has denied tax benefits to many deserving start-ups.
There are over 1.5 lakh DPIIT-registered start-ups. Barely 3,000 have gotten the coveted IMB certification and any tax benefits.
While the benefit of the tax holiday can be debated, given the losses suffered by Indian start-ups, the other benefits around deferred ESOP taxation and carry forward of losses are important to early-stage start-ups.
Reforms around this IMB process have been proposed but not enacted. Allowing start-ups who raise meaningful capital from SEBI/IFSCA regulated AIFs to automatically qualify for the tax benefits would help but are yet to be enacted.
The Budget speech extolled the aspirations of “a light-touch regulatory framework based on principles and trust”. Start-ups and innovation thrive in open environment, not in byzantine regulations.
