The Telegraph
Since 1st March, 1999
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Red carpet for venture capital

New Delhi, July 19: The government plans to bring in a host of sops for venture capital funds, which would include capital gains exemption on exit from unlisted companies, removal of the 33 per cent cap on IPO funding and on investments of not more than 25 per cent in a single knowledge-based start-up.

A high-powered panel report also wants individual investor to be given tax breaks when they invest in knowledge based start-ups. Those investing in domestic venture capital funds with a corpus of less than Rs 250 crore and also specialise in setting up seed stage companies, should also get the tax breaks, the panel said.

Senior officials said the plan, which emanates from a high-powered committee set up by the Planning Commission at the instance of Prime Minister Manmohan Singh, had fine-tuned an earlier report prepared by the finance ministry’s Lahiri Committee.

The panel also said technology institutions should set up enterprise incubation units, which should be exempted from tax as long as they use the profit for innovative activities.

It also seeks to relax the limit on foreign ownership to boost knowledge-based start-ups, such as in technology.

The panel report, which is likely to be implemented through executive fiats as well as changes in the company law, says there is discrimination against domestic investors in tax treatment of capital gains on exit. When they exit an unlisted company, they are charged capital gains tax. However, if they exit listed companies there is no capital gains tax.

Consequently, the panel, which included Nandan Nilekani, CEO of Infosys, Nitin Desai, former finance secretary, and Rajiv Lall, CEO of IDFC, has recommended that capital gains be exempted on exit from unlisted companies.

It also points out that Sebi rules do not allow a venture capital to invest more than one third of all its monies in listed securities. However, this often creates complications as a large number of small company are listed but not widely traded. These firms find it tough to raise capital. Hence the panel has recommended that the government shift the restriction on 33 per cent cap from all listed securities to just securities picked up in the secondary market.

It has also seconded the Lahiri committee recommendation that a cap of 25 per cent on investments in a single start-up should be removed as many venture capital funds do not have a fixed corpus exclusively for investment in India.

The committee has only added a rider that this should be from “an accredited high net worth angel investor”. The committee also proposed changes in the company law to enable start-ups to raise funds through new instruments and help protect investors money in case the firm is liquidated.

The panel said the rules which force domestic VC funds to invest only in domestic start-ups make no sense as many start-ups have overseas arms such as a front-office abroad and a back-office here.

The panel suggests that Sebi should register groups of high net worth individuals located in India or overseas, and offer them the same rights.

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