First, the government tweaked the country’s FDI policy so as to limit Chinese investments into India amid border skirmishes. Now, it has started deliberations on allowing domestic pension and insurance funds to invest in startups to give them access to stable, long-term capital, ET
reported on 28 January.
This, however, isn’t the first time such an idea has been mooted, but industry watchers say now is the right time for Indian institutional investors to become stakeholders in India’s startup story and set the tone for growth for the next decade.
That Indian startups are operating here but registering themselves in international hubs such as Singapore and the US for growth capital has caused alarm in the government. “Flipping”, as the practice is known in industry parlance, helps investors in these markets reduce time spent on paperwork and regulatory procedures.
This issue was most recently raised by Sanjeev Bikhchandani, founder of Info Edge (India) Ltd. that counts job portal Naukri.com and foodtech startup Zomato among its investee companies.
“Over the last 5-7 years, I reckon, between 500-1,000 Indian companies have flipped, and we need to understand that only the best startups flip as these are wooed by overseas investors, he said
in an interview with ET Now last month. “Even if 2% become as successful as Naukri and only 0.5% become as successful as Infosys, it is a future loss of about Rs 17 lakh crore as per today’s market capitalisation.”
“I’m not saying ban flipping. I’m saying create conditions that flipping does not happen… Remember, with flipping, we are losing data, IP (intellectual property), and ownership as a nation,” he added.
To be sure, countries such as Singapore are actively poaching Indian entrepreneurs by easing regulations and providing tax breaks, said Siddharth Pai, founding partner at venture capital firm 3one4 Capital. By not allowing domestic institutional investment in startups, India is missing out on its own growth story, he said.
“If not now, then even if they try doing this two-three years down the line, we lose a generation of entrepreneurs, essentially outside the country,” said Pai, who is also the co-chair (regulatory affairs committee) at industry body Indian Private Equity & Venture Capital Association (IVCA). “Once our flywheel starts, it will be very hard for them to actually attract people.”
It was in December 2019 that the IVCA first mooted the idea of Indian pension funds investing in Indian startups—urging them to allocate 1% of their overall assets to alternate investment funds. The industry body proposed the creation of a startup fund-of-funds backed by the government to channel such investments.
According to Abir Lal Dey, partner at L&L Partners, the current regulatory framework does not explicitly allow domestic pension funds and insurance firms to invest in alternative investment funds for startups.
“Allowing such startup investments at the fag end of a pandemic is a welcome change for the stakeholders including the professionals. We will have to wait for the budget for more clarity in this regard,” he said.
The Indian government would also need capital to support a
recently announced fund-of-funds for startups, which could be the route for domestic pension funds to pump money into startups, Pai said.
Speaking at the 2021 Resurgence TiEcon event in New Delhi on 29 January, Commerce and Industries Minister Piyush Goyal said private and public sector players should come together and dedicate a portion of their wealth to early-stage startups.
“I believe that if all our businesspersons come together and pull their resources—maybe in an initial Rs 10,000 crore in a fund that is domestically driven and professionally managed with no role of the government—then we can really do a great service to the startup world,” he said.