As startups across the country face an unprecedented double whammy of the Covid-19 fallout coupled with new FDI rules, Startup Association of India (SAI), an industry collective, has urged the commerce ministry and Department for Promotion of Industry and Internal Trade (DPIIT) to help it tide through the liquidity crisis and sought exemptions.
The letter, reviewed by Inc42, has sought exemptions for startups from the new FDI rules.
In the light of the recent changes in FDI rules, which restrict direct investments from China as well as other neighbouring countries, the association has sought clarity in the rules as well.
To put it in perspective, Chinese investments in India have grown from $1.6 Bn in 2014 to over $8 Bn in 2017. Further in the context of segment-wise deals between 2014-2019, more than 234 funding deals have been done with Chinese investor participation of which, 49% or 115 were in the growth stage and 39% or 91 were in the late stage.
Hence, undoubtedly, China contributes a significant portion to Indian startup funding. Therefore, the new FDI regulations have raised questions about the impact along with the finer details of the matter.
The Startup Association of India, set up in 2018 by entrepreneurs like MakeMyTrip’s Deep Kalra, Info Edge’s Sanjeev Bikchandani, Indiamart’s Dinesh Agarwal among others, in the letter called for similar clarifications as highlighted by panellists on The Inc42 Show, which includes clarity on beneficial owner and specifications about Hong Kong-based venture capital funds.
Siddarth Pai, founding partner, 3one4 Capital had spoken on The Inc42 Show on the new FDI rules on the Hong Kong issue, saying that most larger funds, as well as corporations, have offices in Hong Kong for investments and business relations with other countries, the FDI rules might also impact many VCs, LPs and investment houses in Hong Kong.
Global Fund of Funds – funds which invest in other funds – have an inordinate presence in Hong Kong and this will have a severe ripple effect on all investors investing in Indian startups.
In a similar spirit, the association said that investments coming from Hong Kong-based venture funds should be exempt from government approvals. This is because Hong Kong is a Special Administrative Region with which India has a separate tax treaty.
Some of the other requests of the association, with regard to new FDI rules include:
- Not applicable for capital calls on existing investors in ventures where they have already invested.
- Not impact any subsequent investment by an existing shareholder in a startup.
- Allow minority stake investments in startups from neighbouring countries with the exception of Pakistan and Bangladesh upto certain identified thresholds like not exceeding 24% in the first round of capital raise without prior government approval
- Exclude investments coming through investment vehicles (such as any overseas venture capital funds) in case the total assets under management or contribution or capitalisation of such funds is less than 49% from neighbouring nations since the nationality of such funds is not possible to determine in most cases.
- Exclude investments that are purely financial in nature without any rights or control in any startup.
Talking to Inc42, Nakul Saxena, director-public policy, iSPIRT, said that startups are looking for benefits from the government considering their impact on jobs and innovation, which will be beneficial for the overall ecosystem.
“On China, it is important to keep the country first, if, at a time when opportunistic countries are taking over businesses, blowback is already happening across the world, it is fair for the government to check the purpose of the investment— though there may be Indian startups which might be affected by Chinese money, I think we have to keep the country safe, and not become a digital colony,” Saxena added.
Further, to tide through the crisis, the association has requested a $3.3 Bn collective fund to help startups tide through the liquidity crunch. The association has suggested that the government can contribute INR 15K Cr ($2 Bn) to the fund, while the remaining INR 10K cr can be SIDBI’s existing Fund of Funds, of which INR 1025 Cr had been disbursed till June 2019.
The association has suggested that the fund be registered as an Alternative Investment Category-II Fund, on the lines of the National Investment and Infrastructure Fund and be managed by professional fund managers.
“The government’s contribution can come over a period of three years as the sponsor of the Fund and this will have the ability to become a $10 Bn over this period by raising money both domestic and foreign institutional investors and sovereign funds,” the letter said.
Saxena added, “That government needs to provide benefits like salary, GST refunds to the startups, but also look at ways of incentivising MSME buying from startups and encouraging that. This will help in solving the demand side of the problem as well or startups.”