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  1. Budget 2016 expectations: Protect startup entrepreneurs from clutches of VC 

Budget 2016 expectations: Protect startup entrepreneurs from clutches of VC 

Fund of Funds: During Startup India policy announcement, government announced that it would create a Fund of Funds (FoF) that would invest in private venture capital funds which in turn will invest in startups.

Published: February 19, 2016 4:57 PM

Fund of Funds: During Startup India policy announcement, government announced that it would create a Fund of Funds (FoF) that would invest in private venture capital funds which in turn will invest in startups. We believe it will be good for the FoF to invest directly in the startup an amount equal to the amount raised by any startup as it will protect the entrepreneurs from the clutches of VC.  This is now possible as they have also defined what is a Startup for the Government recognition sake, thereby, eliminating any large scale misuse of this facility.

Also, the proposed FoF of $1.5 billion will be deployed in tranches over a period of four years viz $400 million year. As per the industry data, last year alone, venture capital investments in India stood at about $1.8 billion. Hence a larger allocation is required to bring about any visible impact on the ground.

Funds: During Startup India policy announcement, government had proposed of creating the fund of funds’ of about $1.5 billion corpus which will be deployed in tranches over a period of four years. This will definitely provide some boost but we expect a detailed roadmap for its implementation with minimal bureaucratic intervention in the upcoming Union Budget.

Besides equity as a mode of capital, which till date the startups have been used to, government should also explore alternate ways of raising funds like Venture debt. Removal of “angel tax” may be crucial to foster the start-up eco-system in India at a time when banks and venture capital funds are pulling away from providing financial aid to such companies.

Tax: A startup friendly tax regime is a need of an hour for our budding industry. The government’s announcement during the Startup Policy to exempt startups for three years was a welcome move. Saying that, any disruptive company will not be able to take advantage of these as it takes more than three years for such companies to start generating decent cash. Hence we believe that there should be some threshold limit, once the company crosses the same than they may be made eligible to be taxed.

Also, further tax breaks, both direct and indirect will further pave way for the new age entrepreneurs.

Removal of “angel tax” along with further relaxation on capital gain tax will motivate individual investors to invest in startups, which are considered as the riskier bet, and thus help startups explore funding from individuals other than usual PEs and VCs. This would also enable startups for raising funds as per their needs, bringing down the overall cost of capital for small companies in early days when the government support schemes will mean the most.

We also expect some clarity on contributions to Provident Funds and ESI for both employees and employers.

Long Term Capital Gains: In our view, there exists an anomaly between listed and unlisted space in treatment of long terms capital gains tax. In case of equity shares transacted on stock exchanges, investors are exempted from paying long term capital gain tax after 1 year while in the case of unlisted companies, they have to pay long term capital gains tax even after 1 year which is only exempted after 3 years. This creates a disincentive to invest in riskier assets. Finance Minister should try to bring the earlier exemption benefit to unlisted companies transactions in the interest of investors looking to invest in start-ups. Besides there should be some clarification on whether it will be applicable on investments in an approved startups or any unlisted company exits.

Ecosystem: Investing in Startups is gaining momentum but there is no organized mechanism for such investors to get an exit at their connivance. To promote risk investing the government should come out with a framework where exit can be provided for such investors. There are several online platforms but broad guidelines for running the platforms will ease the exit process as well as investing in start-ups. This will help create better primary as well as secondary market in start-ups companies along with encourage investors to invest in start-ups who understand the risk of investing in early stage ventures.
Written by Manish Kumar, Co-founder & CEO  GREX

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