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Corporate Feb 28, 2013

Undoing the past: FM winks to give angels wings this Budget

By Sourav Majumdar

The super rich may be sulking, the markets may be miffed and cigarette smokers may be muttering under their breath, but there are some segments which would be pretty satisfied with what Finance Minister Palaniappan Chidambaram has done in Budget2013. Micro, small and medium enterprises (MSMEs), startups and angel investors have got a good deal of attention this year in the Union Budget.

This is in sharp contrast to last year's Budget presented by Pranab Mukherjee where by way of a proposal to unearth unaccounted money, those investing in unlisted firms were proposed to be taxed. This proposal had shocked angel investors - who typically invest in small, unlisted firms - hard and the offending proposal came to be known in funding and entrepreneurial circles as the 'startup tax'.

This year, however, Mukherjee's successor Chidambaram, who has been spending more than his share of time undoing the damage done in the past, has kept the angel investor and the startup community firmly in mind while presenting his Budget. Add to that a package for MSMEs, and you do tend to give the Finance Minister some brownie points for seeking to give a boost to the smaller firms and those funding or incubating them. After all, it is the MSME sector which most believe are the real vehicles of job creation and, as the FM underscored in his Budget, creation of jobs and self-employment opportunities for the youth must be a priority for the future.

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For several smaller companies which are unable to get on with an IPO given the choppy markets and costs involved, the direct listing option will be a huge boost.

For one, MSMEs can continue enjoying the benefits and preferences three years after they grow out of this category. The refinancing capacity of the Small Industries Development Bank of India (Sidbi) has been raised to Rs 10,000 crore and another Rs 100 crore has been provided to India Microfinance Equity Fund. A Rs 500 crore corpus has been given to Sidbi to set up a Credit Guarantee Fund for factoring. Money has been set aside for 15 additional Tool Rooms and Technology Development Centres with World Bank assistance during the 12th Plan period.

But what will really come as something to rejoice for startups or those seeking to launch their own business are the proposals relating to incubators and angel investors. The Budget says that funds provided to technology incubators located within academic Institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure. At a time when the new Companies Act mandates firms to set aside two percent of their profits for CSR activities, these institutions which house tech incubators will gain enormously from this proposal. If done right, this has the potential to benefit several startups which get incubated in educational institutions.

Says Ravi Kiran, co-founder of VentureNursery, India's first angel-backed accelerator: "The move to allow investment in Technology Business Incubators to qualify as CSR investment is a good start and good for tech incubators. Hope it comes with a mechanism to establish accountability of such investments. The Government needs to recognize private accelerators' role in the entrepreneurial ecosystem as well."

"Continuation of non-tax benefits 3 years after the Micro, Small and Medium Enterprises move to next level is welcome, even though the exact impact will need be assessed. I would also have liked to see reforms in the way we define MSMEs today as it is fundamentally flawed in today's context. Angel Invested Funds getting pass through benefit needs to make a distinction between pooled angel investment versus individual investment," he added.

This apart, the Budget allows a category 1 Alternative Investment Fund (AIF) set up as a venture capital fund to get pass-through status under the Income Tax Act. Sebi will now prescribe requirements for angel investor pools by which they can be recognised as Category I AIF venture capital funds. This will come as major news for angel investors and angel networks. More importantly, startups which typically depend on angels for their initial rounds of funding will be benefited.

Another important proposal which will come as a major boost for the SMEs who are seeking listing on the bourses is the one permitting them to list on the SME exchange without being required to make an initial public offer (IPO). For several smaller companies which are unable to get on with an IPO given the choppy markets and costs involved, the direct listing option will be a huge boost.

The Budget which has been variously labeled as 'boring' and 'insipid', has clearly delivered some good news for smaller enterprises.

by Sourav Majumdar

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