News
Centre seeks inputs over FDI dip worries
Summary
During the meeting with DPIIT officials, industry participants highlighted tax authorities’ reluctance to understand the valuation and revenue mismatch in high-growth startupsMUMBAI , NEW DELHI : Concerned about the decline in foreign direct investment (FDI) ahead of next year’s national elections, government officials met with alternative investment funds, startup founders and fund managers last week to identify and iron out operational challenges impeding capital inflows into India, people present in these meetings said.
During the meeting with the department for promotion of industry and internal trade (DPIIT) officials, industry participants highlighted tax authorities’ reluctance to understand the valuation and revenue mismatch in high-growth startups. “Authorities are questioning founders on how they are able to justify their lofty valuations with low revenues and often suspect there is a tax theft," said a person who was present at the meeting.
The meeting coincides with a significant decline in private equity (PE) and venture capital (VC) investments in India over the past six months. This is partly because of higher interest rates in Western nations increasing the cost of capital, making investors wary about deploying capital in risky markets as they were doing earlier.
According to data from Venture Intelligence, a PE-VC data provider, there were 332 deals valued at $17.6 billion in the six months to September, down from $21.7 billion in the year earlier. At the peak of the funding cycle, the figure reached $37 billion for the six months to September 2022. Overall, India received FDI inflows of $70.97 billion in the year ended 31 March, including equity inflows, reinvested earnings, and other capital sources, compared with $84.83 billion in the previous year.
The sharp drop has worried the Centre, and it is seeking inputs to address operational issues, if any, these people said. “They are holding several such meetings across industries with mutual funds, banks and others to understand the dip in funding." A query sent to a spokesperson for DPIIT remained unanswered.
To be sure, unlike many other markets, India is better poised to draw investments and is considered an attractive destination for global funds looking to deploy in Asia. India-focused funds are sitting on more than $20 billion of dry powder (uninvested capital) that is waiting to be deployed, industry estimates suggest.
Industry executives also requested the government to allow convertible notes to be issued by startups beyond the top 100 startups recognised by DPIIT. “A lot of startups want to access innovative ways of raising capital like globally companies are allowed to do," one of the people cited above said.
When startups raise capital, investors are committing an upfront amount but giving it in a staggered manner as and when growth milestones are met. In such cases, the remaining amount is held in an escrow account. As of date, the rules allow such an amount to be held only up to 18 months as against a global standard of 36 months. Industry participants requested the government to look into this issue.
They also asked for a single-window clearance of deals as against individual clearance in case of a syndicated funding round. “In most cases, there is a group of investors that invests in each round, and every investor has to make separate filings leading to operational delay in accessing capital for the firm," another person said.
sneha.shah@livemint.com
