The Economic Times daily newspaper is available online now.

    Expectations from the Azadi ka Amrit Mahotsav Budget: Creating a land of startups, not subsidiaries

    Synopsis

    The budget should allow foreign direct listings to be released so that Indian entrepreneurs based in the country have the same choice of capital markets as their global counterparts.

    entrepreneurThinkStock Photos
    India’s recent changes to ESOP taxation should apply to all Indian startups, not a select few.
    2022 will be seen as the year of revival and rejuvenation. It is a year of celebration of 75 years of India’s independence and the nation’s remarkable journey to becoming the third largest economy in PPP terms. The year also portends well for India economically – India’s growth rate is posited to be above 9%, overtaking China as the fastest growing major economy; GST collections have exceeded Rs 1 lakh crore per month for 6 months in a row; double vaccination numbers should exceed 85% by March 2022; India saw 3 unicorns being created in the first 10 days of January 2022 – in addition to doubling its historic unicorn count in 2021.

    Expectations are high for the 2022 budget to deliver a roadmap for the coming decade. The Atmanirbhar package of 2020 allayed market fears and took care of the most vulnerable sections of society while opening greenfield spaces like space and nuclear, is the perfect launchpad for the next set of reforms. Global headwinds in the form of rising inflation worldwide, supply chain constraints and the “Fed Tapering” demand bold action and increased liberalization to attract capital and foment growth.

    India must build upon the strides made by her startups in recent times. Startup India in 2016 heralded a new lexicon in the Indian economy; India became a land of entrepreneurs, not only businessmen; a land of founders, not just promoters. Indian startups attracted $40 billion of capital, leading to the third largest startup ecosystem globally.

    The new breed of Indian entrepreneurs yet to receive their due recognition are first time Fund Managers. The Indian AIF Industry has paralleled the meteoric rise of the Indian startup industry, growing at a CAGR of 130.38% from December 2012 to September 2021. Under the able guidance of SEBI, the inroad to Indian equities is not through Mauritius – but through Mumbai. The Government of India’s Rs 10,000 crore SIDBI Fund of Funds program launched the careers of numerous Indian fund managers. This strengthening of the rupee capital pool creates a flywheel of foundational capital that will hold India in good stead. Unleashing domestic capital has steadied India on numerous occasions, most recently being 2021 where despite FII being net sellers in the market, Mutual Funds and retail investor participation sent the markets soaring to new highs.
    India needs a similar “Mutual Fund Moment” in the AIF industry—where domestic capital can support India’s capital needs. India no longer lacks capital the way it did in the 1990s; Indians spent $400 billion on gold imports between 2010 to 2021 – the total money coming in from FPIs, FDI and VC was $600 billion in the same period. A fraction of this money going into new asset creation will fundamentally transform the Indian economy.

    Thus, for Budget 2022 the expectations of the “New Economy” of India can be bucketed into 3 themes:
    • Stay Local, Go Global
    • Onshore the Offshore
    • Regulate, don’t restrict
    Stay Local, Go Global
    Geographical borders don’t exist in the digital world and with the onset of the metaverse, which seeks to replicate offline life in the online world, code has become currency. In this paradigm, India’s intellectual and entrepreneurial capital is reshaping the digital world. Securing India’s IP will be as crucial as securing its physical borders and the recent trend of “flipping”. Indian companies moving overseas due to capital, market access or ease of doing business, is not only an economic risk—it jeopardizes India’s digital sovereignty.

    Despite 75 years of Independence, India still has more favourable rules for foreigners as opposed to her own citizens. A foreigner investing in startups is taxed at half the rate that applies to a local Indian investor. Our ESOP taxation norms lead employees into debt to pay the taxes on exercise, as it entails a cash outflow without a corresponding inflow. The inability of Indian startups to accept recurring payments from global players in foreign currency is seeing a steady flight of SAAS companies out of the country. Allowing for foreign direct listings, which was announced in the Atmanirbhar package, should be released so that Indian entrepreneurs based in India can have the same choice of capital markets as their global counterparts. The Indian markets are rewarding Indian startups, so this choice will not see a flight of Indian companies overseas, but a homecoming of Indian entrepreneurs to access global markets.

    India should be a land of startups, not subsidiaries. This budget must stem this brain drain at the earliest

    Onshore the Offshore
    There is no reason for capital investing into India to be domiciled outside the country. Using intermediary geographies to pool capital to invest into India adds unnecessary complexity and cost on capital, leading to lower returns. “Onshore the Offshore” is moving capital pooled offshore onto Indian shores, creating high-paying jobs, increased taxes and greater forex reserves. Both SEBI and RBI must be commended for creating strong frameworks that inspire confidence in global investors to take direct India positions.

    The next set of reforms require the creation of separate bodies of law for investment entities, as the current framework has been force fitted onto AIFs. Consequences of this are visible in the recent CESTAT levy on “Carry”—an investing industry term for the distribution of profits between the investors and fund managers. Despite service tax not being levied on the sale of securities, “Carry”, which originates from security sales, have been deemed a “performance fee” subject to service tax. This is in stark contrast to global practices and is leading to “offshoring the onshore”—the exact opposite of what the government wants!

    A separate framework that’s globally comparable and competitive, light touch regulations, Self-governance frameworks, and automatic approvals for overseas investments will boost the domestic AIF industry and drive the next era of growth.

    Regulate, don’t restrict
    India’s laws have been written for a different era—one of scarcity, control and bad actors. Penal measures and outright bans at the first instance spook investors and entrepreneurs alike. The ban on e-pharmacies in 2019, on cryptocurrency, etc. nip nascent business models in the bud and drive out innovators. For commerce to thrive without jeopardizing law, a more consultative approach with industry is imperative. A ban only drives the activity overseas or underground—and both do not contribute to the economy.

    The current government has made remarkable strides in decriminalizing corporate civil offences, but other related bodies of law are also in need of reform. Broadbasing benefits instead of arbitrarily restricting them sees economic growth, leading to higher tax revenues. India’s recent changes to ESOP taxation should apply to all Indian startups, not a select few.

    Rupee capital, similarly, has faced the short end of the stick compared to its global counterpart. The erstwhile “Angel Tax” issue, which saw rupee capital investments in Indian startups being taxed despite being investments, is a strong example. The government must be commended for acting on this and creating safeguards for the same. The distortions between the taxation of rupee and foreign capital, listed and unlisted securities must end so that investing decisions can be based on prospects, as opposed to taxation.

    Seventy-five years ago, India “made a tryst with destiny and now the time comes when we shall redeem our pledge, not wholly or in full measure”. That time is again upon us, and the hunger of New India is best exemplified in the words of the Prime Minister, Narendra Modi—“No matter at what speed I move forward, I am never satisfied. If today I run at a speed of 100, I keep an aim of running at 200. World has gone far ahead, and we need to match that level.”

    India needs to not only match the speed, but exceed it.

    (The writer is Founding Partner, 3one4 Capital and Co-Chair, Regulatory Affairs, Indian Private Equity and Venture Capital Association (IVCA))
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
    SIDBI MSME Conclave 2024 |Register Now.
    ...more
    The Economic Times

    Stories you might be interested in