Investors, startups want Budget 2021 to ease the flow of rupee capital into the ecosystem

Unlocking new sources of investments into the startup ecosystem and a more friendly tax regime towards the benefit of both investors and startups are among the top asks ahead of the annual budget. At the end of a year which was at best cautious in terms of capital deployment in the growing startup segment, startups and investors are rooting for assurance of a stable investment regime.

Industry bodies representing venture capital funds as well as early stage angel investors and startups have written to the union finance minister asking for parity on treatment of capital gains on selling shares of listed and unlisted shares as well as allowing government insurance firms and pension funds to be able to invest in SEBI approved Alternate Investment Funds (AIF).

Here are some suggestions made by the startup and venture capital ecosystem in India to strengthen the ecosystem:

Allow insurance firms and pension funds to invest more in AIFs

In order to get Indian investors to invest in the domestic startup ecosystem, insurance firms and pension funds should be allowed to increase their exposure to SEBI regulated AIFs, said Ajai Chowdhry, founding member of HCL and board member at Indian Angel Network (IAN) which represents early stage investors.

According to media reports, SEBI has been in conversation with government agencies including the Department for Promotion of Industry and Internal Trade (DPIIT) as well as Insurance Regulatory and Development Authority of India (IRDAI) since July 2020. 

Treat capital gains on listed and unlisted shares at par

At present Long Term Capital Gains (LTCG) through sale of shares in private companies by foreign investors is taxed at 10% while the same is taxed at 20% for domestic venture capital and private equity investors with a surcharge. 

A parliamentary standing committee on finance headed by Jayant Sinha had recommended in its report in September 2020 that LTCG tax for investments in all startups should be removed for a period of two years to encourage investments post pandemic. Suggestions from the venture capital and angel investor bodies to the finance minister have asked for the bringing down of the taxation rate, if not completely doing away with it.

Fund managers seek assurance on Indian investment policies

In October 2020, the Reserve Bank of India reached out to venture capital and private equity funds in India stating that NBFCs (non banking financial company) cannot be set up in India with Foreign Direct Investments (FDI) from Mauritius or jurisdictions which don’t not meet the benchmark of Financial Action task Force (FATF), which looks into money laundering and terror financing. 

The Indian Private Equity and Venture Capital Association (IVCA) wrote to RBI to reconsider its decision as it would aggravate the liquidity worries of NBFCs and stymie the growth of new NBFC models supported by PE and VC investors.

Speaking on behalf of IVCA, Ashish Fafadia of Blume Ventures said that the government can assure Indian fund managers of consistent policy for the long term by issuing comprehensive guidelines for Ahmedabad based GIFT City and bringing it to a logical conclusion. “We want the GIFT City in India to encourage fund managers in India with on-shoring benefits so that foreign capital coming into India does not get trapped.”

Accreditation of domestic investors, easing way for foreign HNIs and Angel Tax

In order to ease submission of PAN and bank statements by angel investors for each investment, IAN’s Chowdhry said that the industry body has written to the finance minister to accredit domestic investors through DPIIT or SEBI. 

He further added that in order to unlock the capital from investors outside of India who do not have PAN and similar KYC, the government should look at relaxing norms to accommodate other KYC documents and allow the investors to participate in startup funding through depositories. 

IAN in its submission has also said that questioning the fair market value of startups under Section 68 of the Income Tax Act continues to bother startups and investors in the angel round and needs to be done away with. 

Taxing ESOPs

Another ask which has made it to the list year after year, and industry body NASSCOM as well as others have recommended time and again, is to tax ESOPs only at the time of sale. The Finance Act 2020 extends deferred tax liability for ‘recognised startups’ subject to conditions. However NASSCOM in its submission to the union finance minister said that taxation should be levied only at the time of sale of ESOPs and should be extended to all startups.