Finance Minister Palaniappan Chidambaram has given respite to small and medium enterprises (MSMEs), startups and angel investors’ fraternity in Budget 2013. This is in sharp contrast to Pranab Mukherjee’s last Budget where he proposed that those investing in unlisted firms were to be taxed. The proposal had shocked the community as most angel investors invest in small, unlisted firms.
With tax exemption for angel investments, easing out listing of SMEs with exemption of having an Initial Public Offerng (IPO), allowing Micro, Small and Medium Enterprises (MSMEs) to continue enjoying the benefits and preferences three years after they grow out of this category, Chidambaram did not disappoint the start-ups as well as investors space.
He also announced extending support to technology incubators; however the decision has been restricted just to incubators housed in academic institutions’.
In other decisions, the refinancing capacity of the Small Industries Development Bank of India (SIDBI) has been raised to Rs 10,000 crore and another Rs 100 crore has been provided to India Microfinance Equity Fund.
Although Industry leaders have welcomed the decision, there is still apprehension on the implementation of the decision of angel investors being registered under ‘Alernative Investment Fund (AIF) category I’ which has tax pass through status.
India Digital Review spoke to some of the leaders in the investment space on how do they see these announcements will affect their decisions.
For Angel Investor Community:-
FM has announced that market regulator Security and Exchange Board of India (SEBI) will prescribe requirements for angel investor by which they can be recognised as Category I AIF venture capital funds and thereby, get tax benefit. However, it is not yet clear whether the decision represents ‘angel funds’ or ‘angel networks’ or both.
Padmaja Ruparel, President, Indian Angel Network said, “What really matter to us, in the Budget, was there was a recognition for angel investment as a class which I think is very important because angel investment is what India needs right now to create new ventures and for employment growth. Chidambaram has spoken on the importance of angel investment and investors entering the AIF category I, but presently there is no clarity on it.”
Angel Investors fundamentally have a choice between investing in a deal versus a VC fund investor who indirectly becomes involved in a deal as VC fund invests in it.
“So, we may be coming to a point wherein we may lose this distinction which is very crucial,” she added.
“The FM has said that Security and Exchange Board of India will prescribe norms for angel investors. So, being a part of Indian Angel Network, I’m looking forward to see how we are going to work out AIF category I for angel investors with SEBI,” she further added.
Terming the decision on the investment community as ‘excellent’, Mahesh Murthy, Venture Capitalist, co-founder of Seedfund said, “For the first time, the FM seems to believe that India will grow - not so much by supporting big business houses like the Ambanis and the Tatas, but by supporting young entrepreneurs. This is a welcome shift.”
On FM's sops for MSMEs, start-ups and angel investors, he added, “It's a long-awaited step in the right direction. Though, as always, there's confusion among other people backing Indian entrepreneurship - overseas investors. The FM and his team have sent out deeply mixed signals in this regard.”
On how SEBI will implement the decision to register angel investors in 'category I AIF' which has tax pass through status, Mahesh said the idea is great but confusion still prevails on this as well for other funds registered under SEBI.
Meanwhile, Alok Mittal, Canan Partners said although the decision is a welcome change, the real concern is taxation of genuine angel investments in hands of companies.
“I welcome the inclusion of angel funds in the tax pass through regime under AIF-1, as well as tax pass through status for AIF-1 itself. The key outstanding concern is the taxation of genuine angel investments in hands of companies – while an assurance to exclude this has been reiterated, it is a matter of urgency to define the norms so that genuine angel investments can restart,” he said.
Listing of SMEs made easy with exemption of having an IPO
FM has announced that SMEs including start-ups can now list themselves on the 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).
“The decision to make listing of SMEs and providing exit to investors which means if they do get exit then they’ll keep investing in this asset class. However, without an IPO situation needs to be worked out,” said Padmaja.
“Also one very crucial point is when investors invest in listed company shares then they get complete tax exemption and they pay zero percent in the long term capital gains whereas when they invest in unlisted companies and in the long term capital gains they pay 20%. So, the catch is the non-listed companies are usually start-ups where angel investors invest so when an investor is taking the maximum risk we are taxing him instead of the other way round. We should have got tax exemption for unlisted companies as well,” she explained.
Mahesh Murthy concluded that this decision needs to be “looked at deeply”.
“It seems to be open to ‘qualified investors’. But who exactly is one and how does one ensure a free and fair market? This route can be misused if the ‘qualified investor’ is in cahoots with the entrepreneur.”
Tech Incubators getting 2% CSR initiative
Chidamabaram has announced that funds provided by corporates to academic incubators will come under corporate social responsibility. The move will encourage more investment in the innovation ecosystem in the country.
Speaking on the decision, Padmaja reiterates that it is a brilliant idea to get 2 per cent CSR initiatives for tech incubators.
“For the incubators, I think it’s a brilliant idea to get a 2% CSR initiative. My only gripe is that the incubators who are sitting in the academic institutes they bring in a lot of engineering and technology expertise to the incubatees but by nature academicians don’t bring business and commercialization expertise. If this 2% CSR was extended to all incubators approved by Ministry of Science and Technology and MSME it would have made a much better impact. I believe the incubation space in India is really starting to thrive this decision if was open to all could have given the perfect impetus to the space,” she said.
Mahesh opined that the decision has both positive and negative implications.
“Incubators to qualify for support from CSR fund hold both in good and bad light. Bad because I cannot imagine a single CSR cell of any large corporate house having the slightest ability to mentor and guide the entrepreneurs they are incubating. God help both in this regard,” he said.
