FM Nirmala Sitharaman interview: No funding winter, funds waiting to see more innovative startups

Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman has said funds are waiting to see more innovative startups from India and there is no scarcity of funding.

In an exclusive interview to Network 18 on February 3, the minister said, “I think the funding is always waiting to see more innovative startups. It’s not as if there is a funding winter or scarcity of funds.”

Her comments even as private equity and venture capital (PE/VC) funding to Indian startups slumped to a 63-month low in January amid rising macroeconomic uncertainties, a trend that can continue at least in the first half of 2023.

Indian startups raised $630 million in January from PE/VC investors across 121 deals, the lowest by value since September 2017, according to data shared by Venture Intelligence with Moneycontrol. In September 2017, startups raised $148.3 million across 39 deals, the data showed.

“It’s more about funds looking at the opportunities available for them. The major push for startups happened in 2016 when the honourable Prime Minister announced a policy. And subsequently year after year giving concessions,” the finance minister said.

Investors have been going slow in funding high-growth ventures amid uncertainties caused by accelerating inflation, rising global interest rates, the specter of recession confronting the West, and the war in Europe that has disrupted supply chains.

The Budget 2023, presented on February 1, has thrown another curveball at startups. According to experts, a new tax provision could severely dent startup investments in the country by foreign investors such as SoftBank, Tiger Global, Alpha Wave and Sequoia.

This is because an exemption for money raised from foreign investors under the so-called angel tax regime has been done away with in the Finance Bill 2023. However, the exemption for investments made by SEBI-registered alternative investment funds continues.

The angel tax regime was started in 2012 as an anti-abuse measure to prevent money laundering. It mandated that a startup’s fundraise could be taxed whenever the funding round happened at a valuation more than the fair value of shares – as determined by a merchant banker.

After years of startups crying themselves hoarse, the government made a concession in 2019 that DPIIT-registered startups would be exempted from the provision. But, the fine print showed that it was not a blanket exemption. It applied only to startups certified by a government body called Inter-Ministerial Board (IMB).

The IMB certifies that a startup is innovative and worthy of receiving benefits under the Income Tax Act, 1961. However, out of the 84,000 startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) as of date, less than 1 percent are IMB certified.