– By Rajesh Singla
India’s startup ecosystem has been making waves on the global stage, attracting attention from investors around the world, including Non-Resident Indians (NRIs). As the country continues to witness the emergence of innovative startups across various sectors, NRIs are presented with enticing opportunities to invest in these ventures. However, like any investment, investing in Indian startups comes with its own set of opportunities and risks.
Why Invest in Indian Startups?
Investing in Indian startups can be a rewarding endeavor for NRIs, as they can benefit from the growth potential, innovation, and social impact of these businesses. Some of the reasons why NRIs should consider investing in Indian startups are:
High Returns: Investing in startups can offer high returns in the long term, as these businesses have the potential to scale up and disrupt the market. For instance, if an NRI had invested just ₹ 1 lakh in Flipkart in 2009, they could have made ₹ 60 Crs in 2020, when the e-commerce giant was acquired by Walmart. Similarly, if an NRI had invested just ₹ 1 lakh in OYO in 2013, they could have made ₹ 50 Crs INR in 2021, when the hospitality startup was valued at $ 9 billion. Likewise, if an NRI had invested ₹ 1 lakh in Swiggy in 2014, they could have easily made ₹ 30 Crs in 2021, when the food delivery startup was valued at $ 5.5 billion.
Social Impact: Investing in Indian startups can also enable NRIs to contribute to the social and economic development of the country. Many Indian startups are solving real-world problems and positively impacting society and the environment. For example, VCI Chemicals is a specialty chemical startup that aims to reduce the dependency of the Middle East market on Chinese imports. Proxgy is a deep-tech IoT startup that offers smart protective wearables, helmets, safety products and solutions for various industries, video conferencing, video search, video augmentation, and video intelligence services. Urban Tots is a toy manufacturing startup that is working on the China+1 theme and comes under the PLI scheme introduced by the Indian Government. It makes non-toxic-based raw material toys, electronic toys, role-play toys, and metallic toys. It sells them in modern retail outlets and direct retail outlets all over India and overseas.
Diversification: Investing in Indian startups can help NRIs diversify their portfolio and reduce their exposure to market fluctuations. By investing in different sectors, such as e-commerce, manufacturing, hospitality, food delivery, education, health care, fintech, and more, NRIs can spread their risk and increase their chances of success. Moreover, investing in Indian startups can also help NRIs tap into the emerging markets and consumer segments in India, which have a huge potential for growth and innovation.
Avenues to Invest in Private Markets
Private markets offer NRIs the opportunity to invest in high-growth potential businesses that are not accessible to the general public. However, private markets also involve higher risk and lower liquidity than public markets and require more due diligence and research from the investors. Some of the avenues to invest in private markets are:
Startups: Startups are early-stage companies that are developing innovative products or services, often leveraging technology and disrupting existing markets. Startups can offer NRIs the chance to invest in the next big thing and support emerging entrepreneurs. However, startups also have a high failure rate and may take a long time to generate returns. For example, Planify offers data and analysis for various startups, such as Proxgy, a deep-tech IoT startup that offers smart protective wearables, helmets, safety products, and solutions for various industries.
Pre-IPOs: Pre-IPOs are companies that are preparing to go public and list their shares on a stock exchange. Pre-IPOs can offer NRIs the opportunity to invest in established and profitable businesses at a discounted price before they become available to the public. However, pre-IPOs also have a high valuation and may face regulatory and market uncertainties.
SMEs: SMEs are small and medium enterprises that operate in various sectors and industries, often catering to niche markets and customers. SMEs can offer NRIs the opportunity to invest in stable and resilient businesses that have a proven track record and growth potential. However, SMEs also have a low visibility and may face competition and operational challenges. For example, Planify offers data and analysis for various SMEs, such as VCI Chemicals, a specialty chemical startup that produces coal tar pitch, a key ingredient for the aluminum industry.
Unicorns: Unicorns are private companies that have a valuation of more than $1 billion, often based on their innovative and disruptive business models and large customer base. Unicorns can offer NRIs the opportunity to invest in the leaders and pioneers of their respective sectors and industries. However, unicorns also have a high valuation and may face scalability and profitability issues.
How to Invest in Indian Startups?
Investing in Indian startups as an NRI can be done through various avenues, such as:
Platform: Online platforms enable NRIs to discover and invest in various instruments in the private markets in India, such as startups, pre-IPOs, unicorns, and MSMEs. Platforms can offer NRIs access to curated and vetted investment opportunities, as well as professional guidance, support, and services. For example, Planify is a platform that provides stock market data and analysis for startups, pre-IPOs, unicorns, and MSMEs. Planify also connects investors with entrepreneurs for hassle-free equity fundraising and angel investing. Planify also offers Funds-as-a-Service, which allows NRIs to invest in Alternative Investment Funds (AIFs) and Venture Funds in India, which are regulated and tax-efficient investment vehicles that invest in startups and other private companies.
Angel Investing: While the risk associated with angel investing is high, it can yield substantial rewards if the startup succeeds. Becoming an angel investor in India often relies on connections and networking within the startup ecosystem. Many startups actively seek investments from established angel investors, and being a part of such a network can provide NRIs with access to a pool of investment opportunities. Additionally, professionally managed angel investment networks offer Funds-as-a-Service, providing multiple avenues for NRI investors to explore.
Venture Capital Funds: These funds pool investments from multiple investors and invest in a portfolio of startups, typically in exchange for a significant stake and a board seat in the company. Venture capital funds can offer NRIs access to high-growth potential startups, as well as professional management, due diligence, and mentorship.
Direct investment: This option allows NRIs to invest directly in Indian startups without any intermediaries or networks. NRIs can find and contact startups that match their interests and preferences, and negotiate the terms and conditions of the investment. Direct investing can give NRIs more control and flexibility over their investments, as well as lower costs and fees. However, direct investing also requires more research, due diligence, and legal compliance from the NRIs, as they have to deal with the regulatory and tax implications of investing in India.
What to Consider Before Investing in Indian Startups?
While the opportunities in India’s startup ecosystem are exciting, NRIs should be mindful of certain factors when considering investments, such as:
Investment Ceilings: The Reserve Bank of India (RBI) has established investment ceilings for NRIs in Indian startups, which vary depending on the sector and the type of investment. For instance, NRIs can invest up to 100% of the paid-up capital of a startup under the automatic route, subject to sectoral caps and other conditions. However, NRIs cannot invest more than 10% of the paid-up capital of a startup engaged in the print media sector, or more than 26% of the paid-up capital of a startup engaged in the broadcasting sector.
Taxation: NRIs are liable to pay taxes in India on their income from investments in Indian startups, as per the Income Tax Act, 1961. NRIs who invest in Indian startups have to pay taxes in India or in their country of residence, depending on various factors. These factors include the type of investment (equity, debt, etc.), the holding period (short-term or long-term), the source of income (dividend, interest, capital gain, etc.), and the tax residency status of the NRI (resident or non-resident). The tax rate and the tax liability may vary according to these factors. However, NRIs can reduce their tax burden by claiming the benefits of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence. The DTAA is a treaty that prevents the same income from being taxed twice in both countries.
Repatriation: Repatriation is subject to certain rules and regulations, such as the Foreign Exchange Management Act (FEMA), 1999, and the RBI guidelines. NRIs can repatriate their funds from investments in Indian startups through two routes: the Non-Resident External (NRE) account or the Non-Resident Ordinary (NRO) account. The NRE account allows NRIs to repatriate their funds freely, without any limit or tax deduction. However, the NRO account imposes certain restrictions on the repatriation of funds, such as a limit of $1 million per financial year and a tax deduction at source (TDS) of 30%.
Conclusion
Investing in Indian startups can be a lucrative and fulfilling option for NRIs, as they can participate in the growth story of India’s economy, innovation, and social impact. However, NRIs should also be careful and diligent in their investment decisions, as they involve high risk and uncertainty. NRIs should do their research, analysis, and due diligence before investing in any startup, and consult with professional advisors, such as financial planners, tax consultants, and legal experts, to understand the implications and consequences of their investments. NRIs should also keep themselves updated with the latest trends, developments, and regulations in the Indian startup ecosystem, and leverage the various platforms and networks available to them to discover and invest in promising startups.
(Rajesh Singla is the CEO & Co-Founder of Planify.)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)
