MCA Questions Investor Premiums, Issues Notices To Startups

The Ministry of Corporate Affairs (MCA) has issued notices to more than 2,000 startups that have raised money since 2013, questioning the valuations at which these startups raised funding.

A media report citing people aware of the notice said that the ministry specifically focussed on companies whose valuations have fallen after the first round of fundraising.

These notices had been issued in the past 45 days and the ministry wants to understand whether these startups have sought exemptions under any government scheme.

“Shares (of the startup) have been issued at a high premium. Please justify the same and also explain whether the company is having any exemption (of) being startup etc….” a notice sent to a startup reportedly said.

The attention to investor premiums comes two years after the income tax department raised similar questions and demanded that startups pay tax at the rate of 33% if their valuations fell after the first round.

In 2012, the then finance minister of India, Pranab Mukherjee, had amended Section 56 of the Finance Act 2012, redefining the ‘Income From Other Sources’ category, which earlier said that a 30.9% tax was applicable on the capital raised by unlisted companies from any individual against an issue of shares in excess of the fair market value.

The tax was classified as ‘income from other sources’ under Section 56 (II) of the Income Tax Act of India.

The tax on ‘income from other sources’ later infamously became popular as angel tax in the Indian startup ecosystem, as it brought down the angel investments in India.

 [The development was reported by ET.]