If the upcoming Union Budget 2023 manages to address experts’ demands, PEs and VCs can afford more flexibility in their investments
As India’s start-up ecosystem has quietly grown into the third largest in the world, only behind the US and China, there is an increasing demand for simplified regulatory framework when it comes to start-ups raising funds via private equity (PE) and venture capital (VC).
In the last one year, the start-up space has been showing a tendency to migrate abroad for better fund raising or other business reasons. With only a few weeks left for Union Budget 2023-24, there are some key demands in the start-up space from the point of view of PEs and VCs.
Experts believe that a simple and separate tax framework should be introduced for PEs, VCs and start-ups. Deloitte demands parity for capital gains tax between listed and unlisted securities. Further, the consulting firm in its Budget Expectations report suggests an easing of taxation on ESOPs (employee stock ownership plans) to ensure single point taxation on transfer and exits.
The report also asks for Indian firms to be allowed to list in overseas markets. Presently, Indian firms can access foreign capital markets only indirectly via American depository receipts (ADRs) or global depository receipts (GDRs). However, being allowed to get listed on foreign bourses would enable Indian companies, especially the new technology-driven ones, to get better valuations.
Access to foreign capital means the ability to raise funds from bigger institutional investors who are more familiar with the tech sector. The Indian capital market is generally assumed to be hold very traditional views on growth and profitability which might seem outdated for new-age start-ups.
Additionally, Deloitte’s report asks for more clarity in direct and indirect tax treatment on carry structures/payments. The report also seeks permission for insurance companies, EPFOs, and other welfare funds to invest in alternate investment funds.
If the upcoming budget 2023 manages to address these demands, and bring about relatively simpler regulation, PEs and VCs can afford more flexibility in their investments. This will be beneficial for the growth of India’s vibrant start-up ecosystem.