Startups: Call For Ease Of Investing

Global economic uncertainties and the fear of some western economies going into recession have severely impacted the growth ambitions of several foreign fund-backed Indian startups by curtailing their ability to go public. As a result, the startup and the investor community is looking for succour from the upcoming budget via tweaks in the taxation and other norms.

Alternate Investment Space
Digressing from the traditional investment routes, many HNIs or ultra HNIs (ultra high net worth individuals) are now stepping into the startup world. Witnessing the upsurge in disposable incomes, the Securities and Exchange Board of India (SEBI) is in the early stages of increasing the minimum ticket size for any limited partner (LP) in Alternate Investment Funds (AIFs) from the existing threshold of Rs 1 crore to Rs 5 crore.

Before this development, private equity and venture capital funds approached the stock exchange regulatory body to seek relaxations and ease in the norms in alternate investment funds. Ankit Kedia, Capital A while commenting on the same said, “The government is trying to balance the private and the public listed companies. But if the ticket size can be gradually increased, it would create less pressure on investors.

Regulatory Norms for ESOPs
Under Budget 2022-23, the surcharge on capital gains such as ESOPs was supposed to be capped at 15 per cent. Padmaja Ruparel, Co-founder, IAN and Founding Partner, IAN Alpha Fund says, “Employee ESOPs should be taxed only when they sell the shares and make money. Any taxation before that does not stand up to logic.”

The demands also include the deferment of the time of payment of tax on the Employee Stock Option Plan (ESOP) being made available to the employees of more startups.

The facility of deferment should be made available to more startups (not limited to the 635 startups with an interministerial board certificate). The National Association of Software and Service Companies (Nasscom) further suggests the criteria to make it available only to employees of DPIIT-registered startups — eligible ESOPs to be offered only to Indian residents and taxpayers, and the terms of the ESOP should be the same for the all the employees to whom these are offered.

Long-term Capital Gains Tax
The expectation is to introduce a new and simplified tax and regulatory framework for private equity/venture capitalists and startups. IAN’s Padmaja Ruparel says that unlisted companies pose a much higher risk for investors. As a result, investors in unlisted companies take a much higher risk and pay a much higher tax than investors in listed companies.

Sanjoy Datta, Partner and Financial Services Industry Leader, Deloitte expects the government to provide parity for capital gains tax treatment between unlisted and listed securities. He expects the government to define and clarify direct and indirect tax treatment on carry structures/payments. “Allow listing by Indian companies overseas and/or provide light-touch regulations for listing on Indian stock exchanges,” says Datta.

Demand for Tax Rationalisation
India is an attractive market for international investors. With a focus on balancing profitable exits and correct valuations, most private equity players plan to introduce a combination of clauses in the shareholders’ agreement, including consideration payable in a contingent manner based on certain performance milestones achieved by the promoters.

Amrish Shah, Partner, Deloitte describes that such clauses incentivise promoters for their good performance. There is no clarity on whether such contingent consideration is to be taxed in the year of transfer or receipt after the consideration crystallises. It may be clarified by an explanation; the contingent portion should be chargeable to tax as capital gains in the year irrespective of the year in which the transfer takes place.

The centre is likely to target nominal GDP growth of about 11-12 per cent in the FY23 budget. To consolidate and augment the growth, cohesive steps are required. Brijesh Damodaran, Co-founder, Auxano Capital asserts, “To encourage the growing interest and contribution of Indian investors, a parity in LTCG should be considered. Making the taxes and their compliance simple to follow should be the endeavour.”

India has the potential to reach 10 million apprentices in ten years. The key to achieving this vision requires budgetary provisions. Rituparna Chakraborty, Co-founder and Executive Director, Team Lease Services lists the expectations: “Incentives and reforms to launch skill universities, extended tax standard operating procedures /higher subsidies to micro and small medium enterprises to adopt apprenticeship, separate regulations in the current University Grants Commission Act and Apprentices Act to scale work-integrated programmes.”