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Venturing woes

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Gayatri Ramanathan Mumbai
Last Updated : Feb 05 2013 | 12:35 AM IST
The move to withdraw tax benefits for venture capital funds could affect start-ups.
 
Finance minister P Chidambaram's move to withdraw the pass through benefits for venture capital funds could the affect the small businesses and start-ups that depend such unconventional funding routes than the funds themselves, say industry experts.
 
Under the new budget proposals domestic VC funds will now be paying taxes on their investments, except in specified sectors such as infrastructure, nano technology, IT/BPO and bio-technology.
 
Says Sandeep Ghosh, head commercial banking at Citigroup, "With the pass through being withdrawn a lot of investors will begin comparing the comparable benefits of investing across emerging economies such as Russia, Brazil or Philippines. And that could mean fewer funds investing in Indian start-ups. And if the other countries offer tax free regimes, that is where much of the money will head."
 
Ghosh goes on to point out that this in turn would affect the nascent business of VCs investing in start-ups. "It is only in the last 18 months that we are seeing VC funds investing in real start-ups. But those funds could shy away from these tax proposals," says Ghosh.
 
According to research by Chennai-based Venture Intelligence which tracks private equity deals, of the 299 private equity deals in India in 2006, 127 were in the $0-10 million category while 102 were in the under $25 million category, accounting for nearly 77 per cent of the total PE deals in the country.
 
While early stage or start-ups received 20 per cent of the investments, growth stage companies received 15 per cent of the equity infusion.
 
Adds Piyush Goenka of Tano Capital, US based VC fund, "The move will have an indirect effect on SMEs as it makes IPOs the preferred route of exit of investors. But a company has to reach a certain size before it can go to the capital markets. Normally, if investors want to exit before that they would sell to a larger private equity fund. Now this is being route choked off which means that the really small start-ups which typically look for venture capital may have difficulty finding it."
 
Goenka points out that while the budget leaves foreign funds untouched, the domestic funds could take up to a 30 per cent hit on their IRRs which in turn would mean that they would look for lower valuation on entry to save on tax. Goenka however, added that the move will give a fillip to the sectors which have been exempted.

 
 

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First Published: Mar 16 2007 | 12:00 AM IST

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