Budget 2023: Expectations From Private Equity And Venture Capital In IndiaIndia's PE and VC industry stands to benefit from structural flexibility, fiscal neutrality, and operational adaptability

On the back of a resilient economic performance, India has retained its position as the third largest startup ecosystem with approximately sixty-one thousand government recognised startups, succeeded by the addition of over a hundred unicorns, signifying the presence of entrepreneurial spirit and scaleable innovation. However, the recent developments in the global economy suggest a time where startups will continue to face challenges in terms of raising funds, owed to the ongoing funding winter which saw a sharp decline in startup funding in 2022.

In the year 2023, the Indian economy is poised to emerge as a growth leader in Asia with a projected rate of 7 per cent, as one of the fastest-growing major economies in the world. With a vibrant and diverse startup culture, there remains a need for the Indian government to scale up investments from private equity (PE) and venture capital (VC) firms to bolster the growth of the startup ecosystem. In a decade, that is, between 2012 and 2021, venture capital investment in India grew thirteen times, from $3.1 billion in 2012 to $38.5 billion in 2021. Thus, it is difficult to neglect the important role played by the PE and VC industry in India's startup journey, and the upcoming Budget 2023 will be expected to address certain demands from the industry that will further help catalyse India's startup ecosystem.

A critical goal for the PE and VC industry in India is to grow domestic capital, while ensuring the inflow of overseas capital for investments. For this to happen, the industry is seeking the introduction of a new and simplified regulatory framework for both, PE and VC firms along with startups. This can be achieved via reducing compliances and timelines for investments in the country, be it domestic or foreign, making investing easy overall. Moreover, for stimulating private market investments, PE and VC firms seek parity between long term gains tax (LTCG) for unlisted shares and public stock investments. Bringing parity between the two asset classes could assist startups by increasing private market investments in the country, as in the current scenario, the LTCG tax on unlisted stocks held for more than twenty-four months is (20 per cent) double that of the tax on listed equity shares held for a period of a year (10 per cent).

Further, there is a crucial need for clarity and definition in direct and indirect tax treatment on carry structures/payments. PE and VC firms are also seeking permission for insurance companies, EPFOs, and other welfare funds to be able to invest in alternative investment funds, along with easing of taxation on ESOPs to ensure single-point taxation on transfers and exits.

At present, American depository receipts and global depository receipts are the only two sources available for Indian firms to access foreign capital markets. New-age technology-driven startups often find it difficult to raise funding from the Indian market, generally due to prevailing traditional views on growth and profitability. To enable access to foreign capital, the upcoming budget should make provisions to allow Indian companies to list in overseas markets, enabling better valuations from bigger institutional investors who may have higher expertise in the tech sector.

India's PE and VC industry stands to benefit from structural flexibility, fiscal neutrality, and operational adaptability, and the upcoming Budget 2023 entails potential to enhance the investment landscape in the country, provided that the government is able to implement tax and regulatory reforms to support the industry, which in turn prove to be beneficial for the growth of India's vibrant startup ecosystem.