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Parliament Panel Wants Startups To End Dependence On Foreign Funding

Parliament Panel Wants Startups To End Dependence On Foreign Funding

The Parliamentary Standing Committee on Finance said that Indian startups must end their reliance on foreign sources of funding

The committee called for the expansion of the Small Industries Development Bank of Indian (SIDBI) Fund-of-Funds vehicle

The committee also called for abolishing the long-term capital gains tax to encourage investments in startups during the pandemic

The Parliamentary Standing Committee on Finance, on Tuesday, while noting that Indian startups must end their reliance on foreign investments for growth, called for an expansion of the Small Industries Development Bank of India (SIDBI) Fund-of-Funds vehicle to enable it to function as an anchor investor. 

The Parliamentary panel, which tabled its report on “Financing the Startup Ecosystem” in the parliament on Tuesday, also talked about abolishing the long-term capital gains tax (LTCG) for all investments in startups made through angel funds, alternate investment funds and investment LLPs, as it felt that this would encourage investments in startups during the pandemic period. The panel said that the LTCG tax should be abolished at least for the next two years. 

Govt’s Pitch For Self-Reliant India

The panel’s recommendations come amid a persistent anti-China sentiment in India, following border tensions between the armies of the two countries in Ladakh’s Galwan Valley since June. Since then, the government has banned hundreds of Chinese mobile applications and told ecommerce platforms to list ‘country of origin’ for all products listed on their website, besides ramping up its Aatmanirbhar Bharat or Self-Reliant India pitch. The Union Law Minister Ravi Shankar Prasad has been quoted as saying that India must end its dependence on foreign imports which push their own agenda. 

In April this year, India changed its Foreign Direct Investment (FDI) rules to mandate that all investment from neighbouring countries in Indian companies would require the approval of the Indian government. 

The move was aimed at preventing the opportunistic takeovers of Indian companies by Chinese firms amid the pandemic when many domestic firms were under fiscal strain. While the changed rule applies to all countries with whom India shares a border and companies whose founders are from these countries, analysts felt it was mainly aimed at Chinese companies, as their heavy presence in the Indian startup economy as shareholders and investors is well documented. 

Anticipating a shortfall in growth capital for domestic startups due to the changed FDI rules, it was felt that the same needs to be offset by Indian financial institutions, investors and domestic pools of capital, to ensure that the country can end its reliance on foreign investment.

In July, Inc42 reported that the Department for Promotion of Industry and Internal Trade (DPIIT) was in talks with the Insurance Regulatory Development Authority of India (IRDAI) and Securities and Exchange Board of India (SEBI) to deliberate whether state-run insurers and pension funds can be allowed to invest in a government-backed startup-focused fund-of-funds. 

Foreign Investments In Indian Startups

Meanwhile, an Inc42 Plus analysis of Indian startup funding between 2015 till the first half of 2020, the US-based venture capital firms and funds have been the biggest source of capital for Indian startups. 

The US-based investors have been a part of 1,564 funding deals, and have funded 985 Indian startups, whereas Japanese investors rank second with 165 funding deals and 112 Indian startups funded. Chinese investors rank third in the list, as they have made 106 funding deals and funded 73 Indian startups. 

According to the report, Chinese investments in Indian startups grew at a compound annual growth rate (CAGR) of 36%.