Indians are great savers. That also makes us risk averse as a people. The government, however, is taking the initiative to move savings from fixed income securities, gold and real estate to much more productive asset classes. Take for instance the Rajiv Equity Savings Scheme introduced in the last Union Budget. The scheme seeks to incentivize retail investment in the capital markets by allowing a 50 per cent tax deduction for those whose annual income is below Rs 10 lakh and who invest up to Rs 50,000 in stocks.
Yet, the government is yet to incentivize investments in venture capital funds, an asset class with the potential to encourage entrepreneurship, startups, productive jobs, and thereby deliver much higher returns. Further, it does not encourage or allow religious and charitable trusts, pension trusts, one of the largest investors in venture capital and private equity funds globally, to invest in venture capital funds. This deprives the industry of a large and growing pool of capital that could be better put to work.
In the upcoming budget, we hope that the honorable Finance Minister will announce measures to encourage the flow of equity capital to startups for generating millions of productive jobs. Measures like permitting pension funds, provident funds, charitable and religious trusts to invest a small part of their corpus in venture capital funds/ AIFs (Alternative Investment Fund) and offering special incentives such as tax deductions to investors in startups or AIFs will indeed help.
The Ministry of Finance can replicate the provisions of Section 54 which has been encouraging HNIs (high net worth individuals) to re-invest capital gains in residential property. HNIs and corporates can now be encouraged to invest in Category 1 AIFs to seek a deduction against capital gains re-invested in AIFs.
Additionally, to really incentivize capital flow into early stage ventures, I hope the Union Budget provides that any capital gains arising from sale of investment in a venture capital undertaking be exempted by introducing a securities transaction tax on the lines of transactions in listed companies. Besides, this Union Budget can play a crucial role in improving India’s ranking from the current 173rd position (in terms of the ease of starting a business, World Bank Report 2013) by simplifying processes and making it easier for entrepreneurs to start a business.
Any effort to ease the life of an entrepreneur in starting and doing business will enhance their productivity. We require startups to focus on customers rather than being lost in multiple compliance activities, while the business is yet to take shape. Angel funds and venture capital funds must get the risk capital required for India from within India. Supporting the flow of long-term capital sources to this asset class can trigger the development initiative. Venture capital investors require funds for a period of 7-12 years for them to create real value by building a startup into a formidable player.
In recent years, the venture capital industry in India has entered its third phase. In the early nineties, the industry was solely supported and led by government-led institutions such as state financial corporations (Gujarat Venture Finance Ltd, Rajasthan Venture Capital Fund, Karnataka Information Technology Venture Fund), TDICI promoted by ICICI and UTI and SIDBI by IDBI. The second phase saw the arrival of international funds, initial led by foreign fund managers and now by local managers.
The third phase started when India saw local fund managers emerging with domestic venture capital funds. This initiative will enable these domestic funds to source risk capital from within India. It is time we make our own savings work for creating jobs for our people.
About the columnist: Sunil K Goyal is founder and CEO of YourNest Angel Fund, an early stage venture capital investment firm founded in 2011. Goyal’s zest for India’s booming entrepreneurial ecosystem has led him to invest in eight startups in his personal capacity. He turned to investing in startups after a successful corporate stint with companies such as Bharti Group and Dabur. Connect with him at LinkedIn. Follow him on Twitter.