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Allow FDI in venture capital and scale up debt offerings: YourNest

07 July, 2014

In a run up to the Union Budget 2014, angel fund YourNest has prepared a wish-list for the growth of startups in the country. The broad points include increasing fund resources, introducing Fund of Fund (FoF) strategy, allowing FDI, relaxing regulations and taxation, easing forming and closing of a company and forming incubators and accelerators.

Budget allocation

In the presentation prepared for the government ahead of the budget, YourNest, has suggested that Fund of Funds (FoF) be created with allocation from Union Budget which is a self-sustaining model over 7 to 10 years. FoF is an investment strategy wherein instead of investing directly in stocks or bonds, portfolio of other investment funds can be taken up.

It has cited Technology Development Board (TDB) and Small Industries Development Bank of India (SIDBI) as highly effective developments. According to the presentation, it is necessary that they are supported for high-risk investments during research and incubation.

On the Rs 5,000 crore India Opportunity Fund proposed for Micro, Small and Medium Enterprises with SIDBI,  YourNest has said that it should be made functional even with a Rs1,000 crore corpus but with capital allocated for a period of 8-12 years.

About India inclusive innovation fund of Rs 5,000 crore, it said that FoF should be extended through the budget at least 10 per cent of its corpus.

The fund has talked about waiver of foreign exchange regulations. It means that the firms will be at ease working with foreign companies such as Google, Amazon, Facebook, Apple and WhatsApp for auto-debits. It has also demanded revisiting current revenue limits for service tax, VAT Excise Duty.

It has also demanded scaling up debt offering. It has said there should be no personal guarantee of promoters when it is by definition collateral free with no third party guarantees.

It has also asked for pressure on banking networks to release such loans besides suggesting bridge funding or working capital loans. It has also demanded for auto payment to MSMEs from large customers within 45 days.

Tax issues

The presentation has also talked about the importance of defining a “small business” and thereafter relaxing regulations for such businesses. It has challenged the need to deduct withholding tax from a start-up from day one.

According to the angel fund, even complying with tax deduction at source and reverse charge mechanism to gross-up for deposit of income tax and service tax should not be essential for start-ups.

It has suggested India to adopt the UK model of supporting start-ups. It started Enterprise Investment Scheme (EIS) business start-up scheme in 1982 to offer personal tax relief for investment in startups and early stage business. Further it asked for replication of scheme of 1995 of UK to extend relief for investment in Venture Capital Trusts for individuals investing GBP 200K for at least five years.

“Enhance exemption for “small company” multi-fold in the Companies Act 2013—for example, process of issue of shares capital, valuation report by merchant banker, need for valuation for issue of ESOPs and need for internal audit,” the presentation said.

Taking a cue from the Kerala government model, it has also suggested a startup village for 1,000 local startups. It has said that chief ministers should commit to allocate funds for start-ups. The government should encourage adoption of productivity enhancement tools and leverage automation in services of mass nature such as taxi booking, bus ticket, tourist ticketing, e-governance etc.

It has also demanded driving savings of rich towards risk capital. “Indian HNIs and ultra HNIs are obsessed with real estate, gold and fixed income. They should be encouraged to be an angel investor, investing in venture capital and private equity.”

In a broader sense, it has demanded that investment in venture capital fund should be considered as a part of their corporate social responsibility.

Suggesting Foreign Direct Investment (FDI) to be the much needed medicine for the sector, YourNest said that automatic route is required for NRI investments.

“A similar provision to be extended to International financial institutions such as Asian Development Bank (ADB), International Finance Corporation (IFC), Commonwealth Development Corporation (CDC) and  Credit Guarantee Fund Trust for Micro and Small Enterprises (CGMSE),” it added.

NRIs have experienced the reward on investing in start-ups in the US, the UK and Singapore. They see India as a very promising market.

It also asked for collateral free loans for the Small and Medium Enterprise (CGMSE) loans for Rs 1 crore. “Stop taking personal guarantee of promoters when it is by definition collateral free with no third party guarantees,” it said. 

According to the presentation, entrepreneurship engine in India, over the next decade, has the potential create 2,500 successful high growth venture and generate 10 million direct and 20-30 million indirect jobs.

Giving a viewpoint of the next 20 years, IT industry body Nasscom President R Chandrashekhar has also said that if India technology entrepreneurship mission is introduced, then India being a large country has the potential to create 50,000 technology startups, generating an employment of 3 million and contributing $100 billion.

The presentation also talks about, permitted self-regulation and self-compliance for small and medium companies (SMCs) during infancy of a business.

The presentation has broadly categorised different ministries which can take up different issues. Ease of process of starting and closing a business is to be taken up by the Ministry of Corporate Affairs. Ease of operating a business in early days, driving saving of rich towards risk capital, allowing flow of long-term institutional capital and Fund-of-Fund (FoF) with allocation from union budget are the issues which will be seen by Ministry of Finance. Allowing of FDI (including NRI funds) in venture capital is to be taken care of by the Ministry of Commerce and Industry.

Meanwhile, it has suggested that chief ministers of different states guide their states in entrepreneurial initiatives.

(Edited by Joby Puthuparampil Johnson)


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Allow FDI in venture capital and scale up debt offerings: YourNest

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