Corporate affairs ministry asks startups to explain investor premium, valuation

The Ministry of Corporate Affairs has issued notices to almost 2,000 startups questioning the valuations at which they raised money from investors, a media report said on Tuesday.

The notices were issued to companies whose valuations fell from their first round of fundraise, The Economic Times reported.

The report said the notices were issued to companies which had raised capital in or after 2013. The notices were issued in the last 45 days. The ministry also wants the startups to specify whether they availed any exemption under any government scheme.

“Shares (of the startup) have been issued at high premium. Please justify the same,” the report said, citing the notice.

The ministry has also asked startups to explain how the share premium was calculated and details of fundraising transactions. The notice doesn’t mention any penalty or taxes, according to the report. TechCircle couldn’t independently verify this.

Sangeeta Gupta, senior vice president and chief strategy officer at industry body Nasscom, said startup valuations depend on several factors including their growth potential. It’s for the investors to decide the valuations and the ministry’s notice asking for an explanation doesn’t hold, she said. “We need to give these companies time to evolve and mature,” she added.

Nasscom, a group of IT and IT-enabled services companies, mentors technology startups as part of its 10,000 Startups initiative.

The reported development has parallels to the notices issued in 2016 by the Central Board of Direct Taxes (CBDT) to startups which had raised funds from angel investors, friends and family or networks not registered with the capital market regulator as Alternative Investment Funds (AIF). The CBDT had argued that the extra capital inflow into startups was taxable as ‘income from other sources’ under Section 56(2) of the Income Tax Act and was liable to be taxed at 30%.

Startups and investors have been demanding that the government abolish this so-called angel tax. In April, the Department of Industrial Policy and Promotion amended the ‘angel tax’ rule and said that startups which were incorporated before 2016 and had raised less than Rs 10 crore in angel investments won’t have to pay this tax.