Small and medium enterprises (SMEs) have always been a focus of the Union Budgets in India. However, this year’s budget had a surprise element for the Indian start-up ecosystem (mainly dominated by tech enterprises or new age companies rather than traditional SMEs). This also has a bearing on the start-up incubators, and also the angel investment ecosystem.
Here’s a quick take on “what the budget means for each of these stakeholders in the Indian start-up ecosystem ??…..”
The finance minister has opened a backdoor listing route for SMEs including startups and they can now list at the two SME exchanges in the country. The proposal will allow such startups to list without going through the elaborate process of an initial public offering (IPO).
However, such firms’ shares will be open for subscription only for a set investor base. A clear picture regarding the modalities is yet to emerge, but it is likely to be in the form of an institutional placement while providing liquidity on the exchanges.
Sanjay Vijayakumar, CEO of MobMe Wireless and chairman of Kochi-based incubator Startup Village, said, “This is a great move because SMEs can now monetise their shareholding and leverage the same as collateral to get money from institutions like the Technology Development Board, where loans can be raised at 5 per cent simple interest rate.”
MobMe is the first tech startup which has already applied to get listed on the SME Exchange in India for its IPO.
Jade Magnet co-founder Sitashwa Srivastava said, “This will open up a genuine fundraising avenue for young companies.” Bangalore-based Jade Magnet offers a design crowdsourcing platform.
“This will potentially create an excellent platform for venture capital and private equity players to deal in their unlisted portfolio companies without having to go through a lengthy and expensive listing process. This can also serve as an alternative and tax-efficient exit route for the funds from their illiquid portfolio companies,” observed Siddharth Shah, partner at the law firm Khaitan & Co.
The government has said that funds given by companies to support tech incubators within academic institutions and approved by the Ministry of Science and Technology or the Ministry of MSME (Micro, small and medium enterprises) will qualify as corporate social responsibility (CSR) expenditure. Although this will not directly affect the growing number of private incubators, it is expected to generate more funds for institutions like the CIIIE (Centre for Innovation, Incubation and Entrepreneurship) which runs iAccelerator and is associated with IIM Ahmedabad.
The companies contributing to such incubators will be able to show those expenses as CSR expense, which is part of the mandatory CSR spend under the new Companies Bill.
“The biggest challenge for incubators is that the funds allocated for its operations are very low,” said Vijayakumar. “So the inclusion of 2 per cent of CSR funds as expenditure for incubators will be a game-changer,” he added.
Ravi Kiran, co-founder of VentureNursery, an angel-backed startup accelerator programme, said that the move to allow investment in technology business incubators (TBIs) as CSR investment is a good step. “I hope it comes with a mechanism to establish accountability of such investments. Also, the government needs to recognise private accelerators’ role in the entrepreneurial ecosystem as well,” he said.
Angel Investors :
Angel investments, which have become a key part of early-stage funding in India in the last two years, got a shocker in last year’s budget because of a proposal, which in effect, amounted to taxing such investments. Although the government was expected to make some clarifications, the latest budget is a win some-lose some scenario for angels.
The finance minister has said that market regulator SEBI will prescribe requirements for ‘angel investor pools’ by which they can be recognised as Category I AIF venture capital funds and thereby, get tax benefit. It is not immediately clear if this represents ‘angel funds’ or ‘angel networks’ or both.
In either case, this may leave out individual angel investment, which is done outside the angel networks such as Indian Angel Network (IAN), Mumbai Angels, Chennai Angels, etc. This may help consolidate such investments while making it tough for those individual angel investors to support the startups in early years.
Padmaja Ruparel of IAN said, “We are happy that the finance minister has recognised genuine angel investing and that this activity should be encouraged. We will work with the SEBI to see how the rule can be applied to angel investors.”
According to Ravi Gururaj, co-founder of HBS Alumni Angels (India Chapter), the new AIF class of investment vehicle will be helpful if it helps catalyse the growth of many new micro funds where investors syndicate to pool in their resources.
“However, I hope the new regulation does not hinder the existing regular angel investing activities, dominated by individuals making investments in their own personal capacity and selectively investing in startups. Such individual activity, which forms the bulk of the current angel activity in India today, should not be adversely impacted by these new norms,” he noted.