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Why the Recent Union Budget Should Get Two Thumbs Up by Angel Investors

Jun 03 2013, 15:37   |   By SME Mentor

Ajeet Khurana

The reaction to this year's budget was no different than earlier budgets. There was an immediate backlash by naysayers. This was followed by more reasoned voices that first wanted to read the fine print before commenting on specifics. But now that the dust has largely settled, one group that should be specifically happy is the small tribe of angel investors in India.

Who Are These Angel Investors?

Investors who invest in early stage startups, typically buying into the equity of these companies are called angel investors. In addition to bringing in money, angel investors also bring in other value in the form of customer contacts, management inputs, mentoring, and the like. The reason they are called angels is that they typically invest in companies where formal investors would not have invested. Of course there is always a doubt about whether angels are actually living up to all of these expectations.

The First Thumbs Up: Why This Budget Should Bring Cheer to Angel Investors?

A little before the budget speech, I was asked by a journalist, "What is your budget wish list as an angel investor?" I told her that I had a single point wish list, and that was, "Leave us alone!"

If you are wondering what kind of a wish list that is, well, it is inspired by the previous budget where the finance minister had proposed what I like to call an "angel-tax." Globally, many jurisdictions offer tax rebates on angel investments, but the result of the angel-tax proposal in the previous budget would effectively do the reverse. Much to the relief of angel investors and startups, the Pranab Mukherjee deferred the implementation of that budget proposal.

In light of this, I guess you can see why I felt that the most I could wish for is that angel investors must be left alone. The absence of any unfavourable proposal is the reason for my first thumbs up for this budget.

The Second Thumbs Up: Acknowledging the Existence and Value of Angel Investors

P Chidambaram went a step further and recognized the role that angel investors play in building the nation's economy. And so that angel investors get all the benefits that were hitherto available only to Venture Capital firms, the finance minister recommended that SEBI work on recognizing angel investor pools as Category-I AIF (Alternative Investment Funds) venture capital funds.

In my opinion this is a substantial step forward for the angel investing movement in India. Not only does it officially recognize the discipline of angel investing, but also provides an unambiguous status in the eyes of the regulator. And for this reason alone, I think that the budget deserves a second thumbs up from angel investors.

Areas of Concern

Despite the logic I have presented above, I find that my fellow angel investors do not seem to be falling out of their seats with joy. In fact, some look morose enough to make you feel that the budget affected them adversely. Here are some of the areas of concern that follow naturally from the budget proposals:

1. Angel investors will finally have to deal with the r-word: Regulation. If SEBI registration becomes mandatory for availing the benefits of angel investing, then angel investors might have to comply with cumbersome regulation, compliance, and reporting.

2. Individual angel investors who operate outside the scope of angel networks and angel funds might find it impossible to get SEBI registration. Would the angel-tax then apply to their investments?

3. Threshold limits to angel investors in terms of minimum net worth or investment size might stifle, if not kill, the angel investment ecosystem.
 
Looking Forward

Certainly the angel investor specific budget proposals raise new questions. But I think that on the whole this is a step in the right direction. Quite likely we are going to toddle a little as we try to find our feet. But that always happens when we take the progressive first step. For an angel investor who is in the game for the long term, this budget deserves two thumbs up.

Ajeet Khurana is an angel investor, trainer, author, entrepreneur and digital marketer. He is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. In addition, he is a trainer for new angel investors with NEN (National Entrepreneurship Network). He is on the boards of Carve Niche Technologies and Rolocule Games, You can reach him on LinkedIn and Twitter.
 
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  •  SME Messenger |   Mar 18 2013,02:24