Budget 2021: Startup investors focus on exit routes, want clarity on China FDI ban

The government’s curbs on capital flows from China has impacted many startups’ ability to raise funds and offer an exit route to investors. Onerous rules for stock-market listing make matters worse. Budget 2021 should ease these challenges, say experts
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As Finance Minister Nirmala Sitharaman gets ready to deliver her annual budget speech, the startup community wants the government to make its position clear on fledgling companies raising capital from China and Hong Kong.

India had curbed the inflow of funds from neighbouring countries and banned dozens of Chinese apps, including TikTok, after a border clash in June last year left at least 20 Indian soldiers dead. Although New Delhi didn’t specifically name Beijing, the restrictions were clearly directed at China since no other neighbour accounts for any significant foreign fund inflows into India.

“We expect some clarity, in the budget or later, on the capital that has been stuck or the lack of capital on account of the China ban,” Rishabh Bharadwaj, Partner at law firm Khaitan & Co, said at a panel discussion organised by YourStory on policy and taxation issues that startups face. “India was receiving a lot of capital from China, which had helped several startups. That has dried up.”

Watch the full YourStory TV Budget 2021 Roundtable here:

Bharadwaj said the restrictions on foreign direct investment from China had also impacted capital flow from Hong Kong, which has a vibrant financial market and is home to many people of Indian origin. “We need to look at [this] seriously,” he said.

To be sure, FDI from China has been declining over the past three-four years, according to figures provided by the Indian government to parliament. In September, the government said FDI from China fell 28 percent in 2019-2020 to $163.77 million. However, these figures may not give a complete picture since many investors often use other jurisdictions such as Singapore to invest in India.

Clarity on exit routes and taxation

Apart from seeking clarity on capital inflows from China and Hong Kong, investors like Naganand Doraswamy, founder and managing director at IdeaSpring Capital, want Sitharaman to focus not just on capital infusion but also on allowing investors an easy exit route.

“Government policy should be geared not just toward capital infusion but also enabling exits,” he said.

Doraswamy said there are multiple ways of getting an exit, including mergers, acquisitions and stock-market listings in India or overseas. Bharadwaj added that the Securities and Exchange Board of India (SEBI) had taken several steps to enable startups to list in India.

In December, SEBI had floated a new consultation paper proposing several changes for the Innovators Growth Platform (IGP) to encourage local startups to launch initial share sales in India. The capital markets regulator had set up the IGP in 2019 but the platform hasn’t gained any traction.

Bharadwaj said there has been little movement on allowing startups to directly list overseas, other than introducing some enabling provisions in the Companies Act. “It will be good to see movement on this front as it will give investors an exit route other than M&As,” he said.

Yet another issue that the startup community wants the finance minister to focus on is taxation.

Indruj Singh Rai, Partner at Khaitan & Co, said the budget needs to address tax-related issues. For instance, capital should not be taxed when it comes in and restrictions on startups on setting up subsidiaries and joint ventures should be removed.

Rai hoped the budget would also address some other issues. “How do you tax the gains you make on startups,” he asked. “Will there be a special taxation regime in cases of overseas listing?” 

For YourStory's multimedia coverage of Budget 2021, visit YourStory's Budget 2021 page or budget.yourstory.com



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