A magic wand to unlock start-up funds

The recommendations of a SEBI-appointed advisory panel, if and when implemented, could increase capital liquidity three to five times to $10-15 billion, opening up a chest of funds to boost entrepreneurship in the country.

Headed by Infosys founder NR Narayana Murthy, the panel had the mandate of suggesting tax reforms to facilitate the raising of capital through alternative investment funds (AIFs). The committee has suggested tax regimes that make it easier for investors to invest and exit ventures.

Serial angel investor Sanjay Mehta said, “Today the velocity of transactions has decreased, and if the recommendations are accepted, it will bring back the momentum within the ecosystem three times and lead to more deals. It will become, in the truest sense, a start-up-India-stand-up-India story.”

But there are some concerns as well.

Mehta said that under current rules, if one has to invest in an AIF, the minimum ticket size is ₹1 crore, which is high. “This should come down to ₹25 lakh.A lot of angel investors will invest in multiple AIFs then,” Mehta said.

Vikram Gupta, founder at Ivy Cap Ventures, said, “₹1 crore is a pain-point for an angel investor — to put that amount in a start-up [is a risk], he is not sure of the value it will create. He might as well put that in real estate instead.”

This view was echoed by Apoorv Sharma, founder of early-stage fund Venture Catalyst. Sharma said currently there are two major challenges, including the ₹1 crore-cap on investments and the 20 per cent tax on short-term capital gains, which hold back investors from exiting a venture when they want to. Besides, angel funds are required to remain invested for three years. If that is removed, it will lead to more participation from investors.

“The tax structure for investments in the unlisted entities or start-ups should be treated at par with listed entities. As a stock market investor, I can sell my shares the next day, but as a start-up investor I can’t do that. That is punitive,” Sharma added.

The recommendations call for the Securities Transaction Tax (STT) regime, similar to listed securities, to be made applicable to all distributions (gross) of AIFs, investments, short-term gains and other income and eliminate any withholding of tax. After STT, income from AIFs should be made tax-free to investors.

Gupta of Ivy Cap Ventures, said, “If the tax reforms are made at par with STT it will help in easy exits wherein the tax becomes zero for the seller. It will improve the number of exits in the market, which is not happening at the moment. It is also a main reason why start-ups are dying because their investors are not getting easy exits.”

The recommendations further add that investment gains on AIFs should be deemed to be capital gains and losses incurred by AIFs should be available to their investors for set-off.

Akash Goel of Bessemer Venture Partner, a fund that had invested in unicorns like Ola, said AIFs should be allowed to invest in sectors where there are FDI regulations. “The recommendations are positive and the biggest impact is that more domestic funds can feed the capital-hungry start-ups who are at the moment seeking help from foreign investors.”

Lower-valuation exits will be accepted easily by investors as net outgo will be reduced resulting in more transactions happening, he added.