Expert says regulatory uncertainty in India is a big problem for private equity, venture capital investors

"The government is ready to talk with startups that are looking to move overseas," union finance minister Nirmala Sitharaman said in her address at a think-tank in Washington DC earlier this week. She also assured that the government will do as much as it can to help startups stay in India.

Well, simplifying domiciling options for startups, and allowing them to list on global stock exchanges are among the 160 policy asks that investor body IVCA has tabled before the government.

The finance minister, as she promised in this year's budget, has set up an expert committee to address the concerns of private equity (PE) and venture capital (VC) investors.

This expert committee, headed by former Sebi chairman, M Damodaran, has been asked to submit its recommendations by December, after conducting a 'comprehensive study' to remove 'end-to-end frictions' in regulatory policy and taxation, so that it becomes easier for PEs and VCs to invest in India, and in turn power India’s startup economy.

The investor community, of course, is pleased with this move. But veteran investors say the challenge before the government in carrying out the end-to-end regulatory clean-up, is nothing short of what was done to put in place the Insolvency & Bankruptcy Code (IBC) in 2016.

Not all practices of alternative investment funds (AIFs) are baked into tax laws. There is still no tax parity in the sale of unlisted versus listed shares. ESOPs are being taxed twice. A lot of domestic capital that is locked up with PSUs, insurers, and provident funds, is yet to be funneled into startups. The list is long, and the industry says the setting up of the expert committee is a step in the right direction.

Interestingly, it also comes at a time when the funding winter is getting frosty, with Indian startups suffering their worst quarter in terms of VC funding in two years!

Pratibha Jain, head of corporate affairs at Everstone Group told CNBC-TV18 that if India can solve the issue of regulatory uncertainty then it can attract pools of PE and VC investments.

Jain said the big issue for global investors is regulatory uncertainty and uncertainty on taxes. Any investment that goes in through PE or VC route is a long-term investment and during that period global investors are used to having stable laws in developed markets.

"However in India, you have to keep in mind that the law may change, the law is changing in the middle of the transaction and regulatory approvals can take sometimes between 6 months to 1 year despite best efforts from the government to make it streamlined. So if we can solve that, then global markets whatever they are facing will not have as much of an impact on India because Indian macroeconomics are pretty good," he said.

According to Ashley Menezes, partner and COO at ChrysCapital and vice chairperson at IVCA Indian startups have a competitive disadvantage as they do not have access to the overseas listing.

"The fact that Indian startups do not have access to overseas listing today, puts them at a competitive disadvantage. They do not have access to global pools of capital as some of their peers may have. So what companies are effectively trying to do to get around the fact that you cannot list overseas is to create a structure overseas and that is fundamentally a wrong approach from a country perspective. You are seeing Indian companies trying to domicile in other jurisdictions so that they can access those markets and effectively you are taking away your taxes, jobs, etc," Menezes said.