The Planning Commission has proposed the government establish a ‘fund of funds’ with a corpus of Rs 5,000 crore ($1 billion) for anchor investments in venture capital (VC) funds in India. Such investments in single funds could be capped at Rs 50 crore, or 50 per cent of the total corpus of the VC fund, it added.
These venture funds would, in turn, raise funds from domestic and foreign sources, and this is estimated to lead to capital flows of up to Rs 25,000 crore in 10 years. The commission has also recommended the India Opportunities Venture Fund, set up under the Small Industries Development bank of India, play a similar role.
In its report ‘Creating a Vibrant Entrepreneurial Ecosystem in India’, the commission also suggested other steps to encourage entrepreneurship in the country. It also proposed several steps to boost funding to new businesses by emphasising on VC, angel investment and government-sponsored incubators.
Among the measures to facilitate exit options for investors, it suggested the finance ministry treat capital gains on investments by angel investors and VC funds on a par with capital gains on investments in listed companies. The report added the Securities and Exchange Board of India could allow companies registered in India to launch initial public offerings on exchanges outside India without, or before, being listing in India. Upon dissolution of a firm, regulations should provide preference to angel or early VC investor shares. VC industry sources said though such a provision existed, it was not strictly adhered to.
On benefits to encourage VC funds in India, the report stated the finance ministry should consider tax benefits to angel investors if they invested in privately-held entrepreneurial ventures, as long as their individual holding in the venture was less than 20 per cent. However, this provision could carry a sunset clause of five or ten years.
Angel groups should be encouraged to form limited liability partnerships to avail of a complete tax pass-through. This would, however, be restricted to angel investments made through recognised angel groups, the report added.
It standardised various definitions for various classes of investors. For instance, an angel investor, it stated, was an individual or a group investing its money in an unlisted entity (up to Rs 5 crore for an individual and for a group, up to Rs 10 crore) in the seed stage.
The report states India has the potential to build about 2,500 highly scalable businesses in the next 10 years and given the probability of entrepreneurial success, it is estimated 10,000 start-ups would be needed for 2,500 large-scale businesses.
