Govt Forms Expert Panel To Identify Measures To Scale VC, PE Investments

Building on its Budget announcement, the government has constituted an expert panel to suggest appropriate measures to increase the inflow of venture capital (VC) and private equity (PE) investments into the country.

The six-member committee will be headed by former Securities and Exchange Board of India (SEBI) chairman M Damodaran, the Ministry of Finance said in an order dated September 9.

Other members of the panel include former RBI wholetime member G Mahalingam, former member CBIC DP Nagendra Kumar, former chief commissioner of income tax Ashish Verma, director general of NCAER Poonam Gupta, and director of AJNIFM Prabhat Ranjan Acharya.

The panel will “comprehensively study, using a systems approach, the end-to-end frictions and potential accelerants from regulatory policy and taxation to facilitate ease of investing, as well as to encourage investments in India”, the order said.

It will also review issues and suggest further changes to accelerate the growth of capital inflow from the VCs and PEs. In addition, the committee has also been entrusted with the task of recommending measures to further accelerate investments into startups and other sunrise sectors.

The expert committee will also suggest “forward looking measures and future ready regulatory practices” to the government, apart from studying and emulating global best practices in the investment space. 

Budget Promise & Funding Winter

The announcement comes nearly seven months after Finance Minister Nirmala Sitharaman, in her Budget 2022-23 speech, stated that the government would form a panel to study regulatory issues being faced by PE and VC firms. 

“Venture capital and private equity invested more than INR 5.5 Lakh Cr last year facilitating one of the largest startup and growth ecosystem. Scaling up this investment requires a holistic examination of regulatory and other frictions. An expert committee will be set up to examine and suggest appropriate measures,” Sitharaman said in her speech. 

The industry has been vocal in its demand for more reforms. Some of the major issues highlighted by foreign investors include paying a higher rate of tax than their Indian counterparts and their portfolio startups not being allowed to list abroad directly. 

Besides, the industry has also been vociferous in its demand for parity in long term capital gains tax (LTCG) on sale of shares in private companies and reforms in ESOPs (employee stock ownership plan).

The move to form the panel comes at a time when the Indian startup ecosystem is reeling under the effects of the funding winter. 

The funding raised by Indian startups plunged 17% year-on-year (YoY) to $20.82 Bn in the first eight months of the  year. This is in stark contrast to 2021 when the Indian startup ecosystem emerged as a darling child of the PE/VC ecosystem and raised $42 Bn across 1,583 deals in 2021. 

Even as the startup funding has seen a decline, the VC and PE firms are keeping their powder dry for investment opportunities. A total of 78 funds were announced in the first half of 2022 with a cumulative corpus fund of more than $12.3 Bn. Of this, $7.5 Bn was raised by VC funds led largely by giants such as Sequoia, Accel India, Jungle Ventures, among others.

The trend somewhat continued across PE funds as well. Earlier this year, US-based PE firm General Atlantic said that it would invest up to $2 Bn in India and SEA startups over the next two years. Close on the heels of that, Mumbai-based OAKS Asset Management also launched its $115 Mn PE fund to cater to the growing demand for investment in the capital-scarce Indian market.