Rajan Eases India Startup Rules With Exit Option for Foreigners

Raghuram Rajan

Raghuram Rajan, governor of the Reserve Bank of India.

Photographer: Dhiraj Singh/Bloomberg
  • Venture capital firms will find it easier to sell investments
  • RBI eases rules governing compliance reporting and remittances

India’s central bank unveiled rules that may lure more overseas investors into the nation’s booming startups.

The Reserve Bank of India allowed overseas investors to sell their stakes in Indian startups to local companies, potentially giving foreign venture capital funds an easier exit route. The regulator also allowed startups to file reports over the Internet, and eased rules governing share transfer transactions, according to a statement posted on RBI’s website.

More options for venture capital funds to profit from their investments or exit struggling companies will lure more overseas investors into Asia’s third-largest economy that’s experiencing an Internet startup boom. Governor Raghuram Rajan’s move follows Prime Minister Narendra Modi’s decision to set up a 100-billion-rupee ($1.5 billion) fund to encourage startup businesses and government pledges to offer tax breaks.

“This was a big pain point for foreign VC’s in India,” said Anil Joshi, founder of Unicorn India Ventures. “If they are able to ease out that one problem, certainly it will attract a lot of overseas VC money.”

The burgeoning industry in India has lured billions of dollars and raised questions about whether valuations are becoming stretched. Much of the money is coming from foreign investors such as SoftBank Group Corp. and Tiger Global Management LLC.

Existing Rules

Under existing rules, shares held by foreign investors are subject to more restrictions than those held by locals.

“This is a reasonably good package,” said Harish Visweswara, a partner at consultant Grant Thornton India LLP. Most of the changes involve “procedural simplifications which would make life easier for entrepreneurs and investors.”

A lack of tax breaks has also curbed the involvement of local investors and encouraged entrepreneurs to domicile their companies in countries that offer lower levies.

In the past decade, most of India’s best performing Internet startups have chosen to establish themselves in countries such as Singapore, even though all of their business is in India. E-commerce companies including Flipkart.com, online grocer Grofers.com and
customer analytics platform Mobikon Asia Pte. are examples of startups from India that have relocated their parent entities to Singapore.

Annual Budget

“I can’t say people won’t go to Singapore” because of the changes, Grant Thornton’s Visweswara said, referring to the Reserve Bank’s rules. “But I would say that this was one of the steps that was required to encourage people to stay back.”

All eyes are now on Feb. 29, when Finance Minister Arun Jaitley presents his annual budget. Startups and investors are waiting to see if the government will ease taxes relating to capital gains on startup investments. Any easing of those rules -- for instance, exempting levies on gains made after holding for a year or more -- could have a “huge impact,” Joshi said.

If Jaitley relaxes capital-gains tax rules “you will see a lot more money coming, not only from India but also from outside India,” Joshi said.

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