Standing Committee report is leveling the field between domestic and foreign capital as a central focus. But the downside risk of doing it at this stage is dying up even existing sources of capital into start-ups.
Chaired by Bharatiya Janata Party leader of the Parliamentary Standing Committee on Finance, Jayant Sinha, recommended a blueprint in a report of ‘Financing the Start-up Ecosystem’ for new-age enterprises to help them find sufficient risk capital, job creation, sail through the pandemic and fuel the economic growth and demand. The committee suggested, with broad political consensus, that the domestic investments in private companies should get a level-playing field with foreign investments.
Having excellent investment opportunities, the risk of foreign capital not coming to India is very low. Diversifying and adding incremental capital pools to enhance start-ups is an essential need. Parity should be pursued capital sources, not just between foreign and domestic capital but also between the listed and unlisted. When it is about unlisted securities, domestic capital is significantly at a stage of disadvantage looking at the tax treatment. The unlisted securities in domestic investments, where the tax rate tends to be about 28%, included of surcharge, for capital gains which are long term and comparing that with listed securities, that being at 10%, it concludes that the domestic capital going into unlisted securities is at a disadvantage.
What we want to do is, Jayant Sinha said in an interview: “introduce a level playing field ideal for both listed and unlisted securities as well as domestic and foreign capital in unlisted securities. We want to do both as this could really enable a bigger pool of capital start-ups. It is not a question of taking away anything, but adding more capital options for financing our start-ups.”
Most countries around the world do attract a lot of foreign capital but they are also able to mobilize domestic capital. If we reach a funding mix of 50-50 between the foreign and domestic capital, then it is a good mix. The foreign capital at present is 80-90% and only the rest is domestic capital.
The Standing Committee’s reports don’t bind on the government, and is there a bipartisan consensus on the recommendation?
“This is exactly a bipartisan report. We have representatives from all political parties in the standing committee, also we have had many hearings on the start-up financing matter because it stands vital for India’s economic growth that our start-ups get finance and do well,” Jayant Sinha said. The members of the committee were undivided in this view. They should be able to mobilize more domestic capital and make it possible for the entrepreneurs to be able to access all sources of capital.
One obvious concern the finance ministry will have is to ensure neutrality in revenue which is important for the government. “So, we have suggested an approach, where, for the next couple of years, we can give a tax window, which encourages investment right now and thereafter, we can look at adjustments like Securities Transaction Tax (STT), so that the revenue can be maintained,” Jayant Sinha stated. There are other ways to enable revenue neutrality, but at this point, it is important to get the economy going, and a ‘tax holiday’ for the start-ups for a period of time might really benefit the economy.
There are many start-ups from India which are successfully listed abroad. But those are in the countries with easier rules, can there be a change in the future?
Providing a level playing field by removing the irregularities, there will be a lot more listings in India as well. Encouraging listings in the markets overseas is also necessary at the same time because it creates a deeper investor pool for the companies and enables them to raise capital at lower prices. Indian companies should benefit from these investor pools overseas and in India as well. It is a good thing that their many companies listed in the overseas markets.
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