As the startup funding climate faces challenges, investors and companies await Budget 2024 for potential relief and clarity on regulatory concerns. The venture capital (VC) and private equity (PE) ecosystem, grappling with recent circulars emphasizing transparency and compliance for Alternative Investment Funds (AIFs), anticipates crucial clarifications.
Startup Funding Downturn
The past year witnessed a significant downturn in startup funding, with 2023 marking the lowest in five years, showcasing a 72% year-on-year decline. The challenges in raising equity rounds have intensified, prompting the industry to seek solutions amid a challenging economic backdrop.
SEBI Circular on AIFs
The Securities and Exchange Board of India (SEBI) has heightened its focus on regulatory compliance and transparency for AIFs, essential components of private investment vehicles. The Indian Venture and Alternate Capital Association (IVCA) engages with regulatory bodies, expecting potential rule changes and clarification on recent circulars affecting the industry.
Seeking Clarifications on SEBI Circular
IVCA’s discussions with the finance ministry include seeking clarification on SEBI’s April 2023 circular regarding the excuse or exclusion clause for investors in AIFs. The circular enables AIFs to excuse investors from specific investments if they violate existing laws. IVCA aims to address concerns and foster regulatory alignment on these matters.
Encouraging Domestic Capital
Stakeholders stress the importance of creating larger pools of domestic capital. Initiatives to encourage Indian banks, insurance companies, and pension funds to invest in startups become essential. Calls for aligning startup investment with priority sector status echo, emphasizing the need to increase domestic capital share from 15% to 25% in the coming years.
RBI Circular Impact
A December 2023 circular from the Reserve Bank of India (RBI) prohibiting regulated entities from investing in AIFs with downstream investments poses challenges. Regulated entities face a mandate to liquidate such investments within 30 days or make 100% provisions. IVCA highlights the impact on funding sources for startups, emphasizing the need for a more enabling system.
Uniform Taxation and ESOP Clarity
Industry stakeholders advocate for uniform taxation on listed and unlisted securities, along with clarity on Employee Stock Ownership Plans (ESOPs) taxation at the time of share sale. Procedural clarifications on valuation norms and FDI opportunities are on the wishlist.
Transparency in VC Firms
Calls for SEBI to mandate transparency in VC firms gain traction. Investors emphasize the need for sharing details on key decisions, including profit sharing and carry shares structure. Transparency is seen as a crucial element to build trust and widen the customer base for AIFs.
Tax Collection at Source Concerns
IVCA seeks clarification on Tax Collection at Source provisions to ensure they don’t apply to AIFs, securities trusts, REITs, and Infrastructure Investment Trusts, safeguarding the interests of these investment vehicles.
Relaxation on Due Dates
As a practical measure, IVCA proposes relaxation on the due date for filing Form 64D by venture capital firms, suggesting an extension for uploading audited statements by September 30 after submitting unaudited financial statements by June 15.
Conclusion
With Budget 2024 on the horizon, stakeholders eagerly await policy measures that foster regulatory clarity, encourage domestic investment, and address the challenges faced by the VC and PE sectors.
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