In an interview to Mint, Sinha explains why this is vital in the current economic circumstances. Edited excerpts:
The central focus of the Standing Committee report is levelling the field between domestic and foreign capital. But the downside risk of doing it at this stage is drying up even existing sources of capital into start-ups.
There is very little risk of foreign capital not coming to India. It will continue because we have excellent investment opportunities. What we really need to do is to diversify and also add incremental capital pools to enhance our startups. We are saying we should be pursuing parity for capital sources, not just between foreign and domestic capital but also between listed and unlisted securities.
If we look at the tax treatment, you will find that domestic capital is at a significant disadvantage to foreign capital when it comes to unlisted securities. When you look at domestic investment in unlisted securities where the tax rate tends to be about 28%, including a surcharge, even for long term capital gains, and you compare with listed securities, which is at 10%, there you find that domestic capital going into unlisted securities is at a significant disadvantage.
What we want to do is introduce a level playing field idea for both listed and unlisted securities as well as domestic and foreign capital in unlisted securities. We want to do both as this could really enable a bigger pool of capital for start-ups. It is not a question of taking anything away, but adding more capital options for financing our start-ups.
Does this stem from a fear about foreign capital owning domestic enterprises?
As per the honourable prime minister’s vision of a self-reliant India, we of course want to be in a situation where we are able to finance our growth and startups and not be overly reliant on foreign capital, whichever source it may be. Most countries around the world do attract a lot of foreign capital but are also able to mobilise domestic capital. If we are able to get to a funding mix of 50:50 between foreign and domestic capital, it is a good mix. But at present, 80-90% is foreign capital and only the rest is domestic capital.
The standing committee’s report is not binding on the government. At the same time there is bipartisan consensus on the recommendations?
Exactly. This is a bipartisan report. We have representatives from all political parties in the standing committee and we have had many hearings on the matter of start-up financing as it is vital for India’s economic growth that our start-ups get finance and do well. All members of the standing committee were unanimous in this view that we should be able to mobilise more domestic capital and make it possible for entrepreneurs to access all sources of capital. We had a very strong consensus on that…
Our report has now been presented to Parliament and to the government as well. Standing committee recommendations are inputs to government policy making. The government is expected to respond with an action taken report on our recommendations and we expect and are hoping that we will have very good dialogue with the government to see how much of it can be implemented and how soon.
What signals did you receive during your engagement with the officials of the ministry of finance?
The ministry of finance is really responsive towards all good, high quality policy suggestions. We all share the same objective, which is to generate fast growth in the Indian economy, create jobs and enable wealth creation. They are on the same page as these objectives are concerned. We now have to find a way of enabling these things to happen quickly and efficiently.
Obviously the one concern that the finance ministry will have which I appreciate fully is to ensure revenue neutrality which is important for the government. So we have suggested an approach, where, for the next couple of years, we can give a tax window so that it encourages investment right now and thereafter, we can look at Securities Transaction Tax (STT)-type adjustments so that revenue neutrality can be maintained. There are various ways to enable revenue neutrality.
But at this point in time, it is important for getting the economy going and I think a tax holiday for some period for start-ups is really going to be beneficial for the economy
Your committee report argues for domestic FIs to invest in startups. They have no risk appetite for normal lending, so why would they fund startups?
Domestic investors are very interested in financing startups but naturally they expect a level playing field which means that the tax treatment has to be on par with listed securities and we have to enable large domestic institutional investors to be supportive. That is because there is obviously a challenge when you finance a startup largely through angel or early stage venture capital fund, then, when they need scale up financing, it becomes difficult to provide the same and that is what makes our domestic investors a little reluctant to participate. If they know they have sufficient capital available at all funding stages, and that they can exit which is an over-riding concern for an investor, then they are much more inclined to participate. We have to make sure the whole investing cycle is robust.
How far do we need to go forward in having a startup ecosystem to create global champions?
We have come very far. India today has the third largest startup ecosystem in the world and has produced 30-40 unicorns in the last decade or so. Every country is competing for these top-notch entrepreneurs. We have a terrific number of them in India but have to make sure we make it possible for them to grow and scale up their businesses.
You have recommended that NPS should be allowed to invest a part of its corpus to alternate investment funds. Can we assume political consensus?
It is a consensus report, in which all political parties are represented.
The way NPS should consider investing in start-ups is a very small portion of their overall portfolio, and as far as NPS is concerned, the discretion in investing in one investment vehicle against another is largely in the hands of the pension contributors themselves. NPS participants can decide the mix of investments they want. So NPS should make this option available.
Many successful startups from India are listed abroad to take advantage of the easier rules in countries like Singapore. Do you foresee the situation changing?
By removing the anomalies and providing a level playing field we will see a lot more listings in India as well. At the same time, we also want to encourage listings in overseas markets because it creates a deeper investor pool for our companies and enables them to raise capital at lower prices. We want our companies to benefit from investor pools overseas and in India. Many of our large companies are listed in overseas markets as well. We think it is a good thing.