Government plans tax sops for angel investors

Government plans tax sops for angel investors

New Delhi: In a bid to promote funding for start-ups, the government plans to offer tax breaks to angel investors, who provide a part of their personal wealth as seed capital for such firms.

A proposed legislation, the National Innovation Act, envisages doing away with the stamp duty currently levied on shares held by angel investors and the tax imposed on profits they make in early-stage firms, according to the department of science and technology, or DST, website.

Entrepreneurs who have untested business models or innovative ideas typically get their first round of funding from angel investors. If and when their business model works and they are ready for scale-up, they approach venture capitalists who usually pump in more money (at least $5 million, or Rs25 crore) in the company in return for an equity stake.

Angel investors, who typically invest up to $2 million in start-ups, broadly differ from venture capitalists in the scale of funding. Besides, angels invest their personal wealth as opposed to venture capitalists who mostly work as fund managers.

Experts say that venture as well as angel funding for start-ups in India is extremely low.

“In 2007, angel investors in the United States contributed nearly $29 billion (nearly Rs1.5 trillion) towards start-ups. In India, I don’t think the figure is more than $200 million (Rs1,000 crore)," said Saurabh Srivastava, co-founder of the India Angel Network, an association of people who invest their personal wealth in early-stage companies.

The government wants to develop a big base of angel investors in the country.

“Rather than convincing a few people to put in big money, we would like more people to come in with smaller amounts," said a senior DST official who didn’t want to be named. DST falls under the Union ministry of science and technology.

“Angel investments are risky, but potentially promise high returns (lower valuation and hence greater stake in the company) if the company is a success. So these tax breaks could encourage angel investors to be more generous," he added.

There are no details yet of the extent of tax breaks on the anvil, which, the official added, would be discussed with the finance ministry in December.

However, these sops would apply only to companies that are incubated in designated areas—called special innovation zones (SIZs)—and are likely to include technology parks and incubation facilities of academic institutions such as the Indian Institutes of Technology, or IITs, he said.

Though specific SIZs are yet to be identified, the official said the recently announced biotechnology cluster at Mohali in Punjab (that will consist of established and start-up biotechnology companies as well as universities), the Research Park at the Indian Institute of Technology, Madras, and incubator campuses in Delhi and Mumbai IITs may qualify as SIZs.

Srivastava, who welcomed such a proposal, said: “Though liquidity is tight, serious investors would still consider alternative investments such as investing in high-potential early-stage companies."