Budget 2023: What are the pre-budget expectations for unlisted markets?

Our finance minister Nirmala Sitaraman will introduce the Union Budget 2023 on February 1 in the parliament, with the announcement scheduled to begin at 11 AM. Unlisted shares or companies are securities that are not listed on the stock exchanges and hence through an initial public offering (IPO), the unlisted companies make their debut in stock exchanges. As we have observed recently, the majority of initial public offerings (IPOs) are oversubscribed because of high demand, raising liquidity concerns. Due to individual investors’ growing interest in IPOs, what should the government declare for the unlisted market, considering the advent of start-ups and modern businesses?

Krishna Raghvan, Founder at Unlistedkart said “Startups currently have taxation benefits u/s 80 IAC where they can take rebates for any 3 out of 10 FYs. However, this was applicable only for eligible startups and incorporated till 31.03.2023. This could be further extended by one more year. There should be a single window for all relevant registrations like company incorporation, shop establishment, goods and services tax (GST) registration, MSME (micro, small and medium enterprises) certificate etc. That will help startups save considerable time, effort, and money. In line with the National Single Window System, that has been started recently, something similar for the startups would help too.”

“About 90% of the total investment for start-ups in India comes from VC firms, angel investors, and incubators/accelerators. There are approximately 364 venture capital funds active in India (SEBI, 2014). The number could reach 480 if the non-SEBI registered ones are included (Venture Intelligence, 2013). Only in academic settings have there been established about 180 business incubators. Today, a number of angel networks are actively running out of India’s main start-up clusters. The Securities and Exchange Board of India (SEBI) is in the early-stage planning to increase the minimum ticket size for any Limited Partner (LP) in Alternate Investment Funds (AIFs) from the existing threshold of 1 crore to 5 crore,” said Krishna Raghvan.

“Prior to this development, private equity and venture capital funds contacted the regulatory authority for the stock market to request a relaxation of the rules and an easing of the requirements for alternative investment funds. The government aims to strike a balance between privately held and publicly traded businesses. However, if the ticket size could be raised gradually, it would put less strain on investors. A new, more straightforward tax and regulatory structure for startups, venture capitalists, and private equity firms are anticipated. Investors are substantially more at risk when investing in unlisted companies. Investors in unlisted companies, therefore, assume a lot more risk and pay a lot more tax than those in listed ones,” he further added.

“In India Listed LTCG shares are taxed at 10% and unlisted equity investments are taxed at 20%. From Budget 2022 there was a maximum cap of 15% on Long term capital gains as previously unlisted investments were liable for a maximum surcharge of 37%. The period of holding for listed equity to become long-term is 12 months whereas for unlisted equity it is 24 months. The capital gains tax law is very complicated in India with respect to various classes of assets, tax rates and period of holding and indexation benefits. A restructuring of the same like bringing in uniformity for tax rates, period of holding and compliances would close the gap between listed and unlisted equity,” said Krishna Raghvan.

“The levy on capital gains, such as ESOPs, was intended to be capped at 15% under Budget 2022. Employees holding these options (ESOPs) should only be subject to taxation when they sell their shares and generate money. Any taxes imposed before that are illogical. Among the demands is the postponement of the tax payment deadline for the Employee Stock Option Plan (ESOP) that is made available to workers of more businesses. More startups should be given access to the deferment option (not limited to the 635 startups with an Inter-Ministerial Board Certificate). Taxing the ESOP at the point of sale, and not at the time of vesting, is a longstanding industry demand. Based on previous transactions and fund-raising efforts, companies must declare their key performance indicators (KPIs) and price per share,” said Krishna Raghvan.

Rajat Khurana, SVP – Private Markets, Lighthouse Canton India said “India has emerged as an important destination for venture capital on the world stage & is ranked currently as the third largest start-up ecosystem in terms of the number of unicorns. We are making a significant mark on the global stage, however there is still ample scope to make it more feasible from a regulatory standpoint. Especially on the taxation front, simplification and parity are crucial elements for putting unlisted equity at par with listed equities, both in terms of tax rates as well as holding period for defining LTCG & STCG.”

“Also there is a lot of discussion around the increase in minimum ticket sizes for AIFs from 1 crore to 5 crores. While there is a need for an increase in ticket sizes, it should be implemented in a gradual manner. A large percentage of capital streaming in is still foreign, but we do see a gradual increase in the domestic institutional investors and large single-family offices where they have shown great interest including the allocation of portfolios. However private capital is still a relatively new asset class that many 1st time investors are closely watching. Herein, a 5X increase might act as a deterrent for someone who wants to test the waters, gain better understanding of the asset class, and increase allocation over time. Even though the increase is warranted, a fivefold increase might be more of a sneer than a facilitator,” Rajat Khurana further added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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